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In 2010 the Supreme Court ruled in favor of Citizens United, opening the door for unlimited political contributions, essentially turning major political races over to billionaires.  Republicans and Democrats now openly agree this has had a major impact on the political process.

Billionaire Donald Trump himself has openly criticized this decision, calling it a disaster for Democracy.   During the campaign he has also called opponents, including Marco Rubio and Ted Cruz ,”puppets for their billionaire donors.”  Trump is self funding his campaign.

Parish & Company reviews candidates financial information for various news organizations and this post looks at the Donald J Trump foundation.  The purpose is not to criticize Mr. Trump but rather articulate key dynamics for these journalists.

Most notable about the foundation is how small it is, with total assets of only $1.3 million.

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In 2014 Trump’s foundation received contributions of only $497,400,  of which 95 percent came from Richard Ebers, whose firm markets high end tickets to sporting and entertainment events.   Trump did not contribute to his own foundation, even though his children are directors.

Of the $596,700 disbursed, the largest amount, $100,000, went to Citizens United.    The address listed on the disclosure is indeed that of Citizens United, the organization that won the landmark Supreme Court case in 2010 and continues to aggressively fight all disclosure related to political campaign contributions.

What is particularly surprising about this contribution is that it occurred years after the court decision when it was fully realized that the decision had already corrupted the election system, handing it over to billionaires.   More recently Citizens United has filed numerous cases at the State level, fighting against the disclosure of the very donor information kept private that Trump now criticizes.

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The following exhibit lists the board members and officers for the Donald J Trump foundation.

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The whole structure appears to be a cozy tax advantaged system.  Donald’s friend Roger donates $477K to the Trump foundation and gets a full tax deduction for his contribution.  Trump then sends $100K along to Citizens United to fight all rules related to political campaign donors identities being revealed.

Most surprising to me is that the contribution occurred in 2014, years after the Citizens United decision, and close to Trump initiating his Presidential bid.   Some may say this contribution burnished his conservative credentials yet why would he disparage his kids reputations by having them as board members?  Yes indeed Donald, the system is broken.

Here is a link to the complete filing for the Donald J Trump foundation for the year ending December 31, 2014.

http://990s.foundationcenter.org/990pf_pdf_archive/133/133404773/133404773_201412_990PF.pdf?_ga=1.225510938.1063016892.1455902940

 

 

 

 

berniesanders

Today Bernie Sanders finally released a tax return, only one year, 2014.   The obvious questions is, why has it been so difficult for Senator Sanders to reveal his tax returns while his opponent Hillary Clinton has released several years of complete returns, opening her up to severe criticism over her income sources.  After only releasing two pages of his federal return with no schedule of itemized deductions, he then released 7 pages for the 2014 return.

For a former CPA and now investment advisor like myself who does these reviews for numerous major news organizations, two names come to mind when reviewing Sanders return.  The first is Rick Santorum, former Republican candidate, who like Sanders “self prepared” his returns in 2012.   This is simply remarkable, that a Presidential candidate would not pay a few hundred dollars to have a CPA complete his return and likely the chances of avoiding an error.  It also raises the question of Sanders capacity to manage/delegate in general.

The second name is Marco Rubio, another former candidate, who like Sanders seems to have some issues regarding personal financial management.  Of course Rubio is only 44 yet Sanders is 74.  Rubio had a 6.5 percent mortgage on his home when anyone with reasonable credit could have refinanced at 3.5 percent over the last few years.  Why didn’t he do that is the obvious question, was his credit so bad he could not refinance?

In Sanders case he has itemized interest for mortgages for almost $23,000.  Current tax law allows one to deduct interest from two residences, provided neither is used as a rental and Sanders indeed appears to maintain residences in both Vermont and D.C.

What $23,000 in interest means is that Sanders likely has half a million in mortgage debt.   Rather odd for someone with the salary of a US Senator and all the related benefits.  It is not clear whether Sanders mortgage is with a credit union or one the large banks he often criticized.  Also, why so much mortgage debt at 74?

What is most surprising is that on his personal financial disclosure filed May 2015, he and his wife reveal that they have invested in 20 different VALIC mutual funds.  Of course VALIC is a subsidiary of AIG and was at the heart of the financial crisis that decimated many retirees savings.  These funds could be transferred to Vanguard or another firm free of such issues.

VALIC has been known for fleecing retirees via high priced annuity related products being sold into retirement accounts and of course they have criticized the new “fiduciary rule” that would require its advisors to put their clients needs above their own.  Former SEC Chair Arthur Levitt has called the failure to implement this rule a “national disgrace.”

Independent advisors like myself already have to abide by this rule yet large firms like VALIC use an arcane loophole, the “Merrill Lynch Loophole” to avoid complying.

On Sanders 1040 it shows he and his wife earned $156,000, mostly his salary as a sitting US Senator, and also that both he and his wife are collecting social security.   The total social security income is $46,213 and since the maximum benefit provided to one person is approx $31,000, this means they are both collecting.   Social security is of course one of Senator Sanders key issues.  Perhaps there is a logical explanation, whatever it is, more disclosure is clearly needed.

“I may never see my social security” is a standard comment from younger voters, Sanders primary base, and it is surprising that he has not elected to defer social security until he retires from the Senate.   Both Bill and Hillary Clinton are also eligible yet per their tax return have clearly deferred collecting these payments.  Although deferrals until the age of 70 will result in a higher payment, one would think the Clinton’s would continue the deferral after 70, even if no increase occurs, until such time neither is actively working in government.

Although social security payments are fully taxable to the Sanders, what he might advocate is that all taxpayers with income above a certain threshold are simply not eligible to collect.  Currently, if you earn $2 billion a year, you can still collect social security.

Comparing himself and claiming poverty compared to other US Senators while earning $200K and enjoying substantial benefits is probably not the good strategy when according to the last US census, median household income was $51,939.

To some this is the very definition of double dipping.   Again, how is it that a sitting US Senator fully employed and earning a substantial salary and related benefits can be collecting social security, as corroborated via the release of his tax return?

 

 

The following Friend of the Court Brief  was sent to Magistrate Judge Nathanael Cousins, United States District Court, Northern District of California regarding the Intel 401K Class Action.

 

January 15, 2016

 

TO: Judge Nathanael Cousins

San Jose Courthouse, Courtroom 7 – 4th Floor

280 South 1st Street

San Jose, CA 95113

 

FROM: Bill Parish, Parish & Company

10260 SW Greenburg Rd., Suite 400

Portland, Oregon 97223

 

SUBJECT: Friend of the Court Brief – Intel 401K Class Action, Why a Nuisance Case Resulting from a Plagiarized Analysis whose conclusions were misrepresented.

 

Dear Judge Cousins,

This is the third time in 20 years as a registered investment advisor I have submitted a friend of the court brief. The first was regarding the Microsoft Anti-trust case, which I supported and the second was regarding the Hewlett Packard/Compaq merger, which I opposed. This brief will explain how my work on Intel’s 401K was plagiarized and misused by plaintiff shopping attorneys. See page 28, point 113 of complaint, for reference to my blog post made in January 2014.

I am generally recognized as a national expert in evaluating retirement plans, going back to 1998 when my work was featured in a major article, also featuring then Secretary of Labor Alexis Herman, regarding the importance of adhering to the 404C prudent fiduciary guidelines.

Leading national journalists are constantly asking me to review various financial data, including financial disclosures and tax returns of local, regional and national politicians. This includes Romney’s financials for the Wall Street Journal, Jeb Bush for the LA Times, etc. In December 2015 the NY Times ran a story on Intel’s 401K that featured my comments. There is also extensive national and international coverage of my comments regarding hedge and private equity funds going back to 2003, focusing on KKR, TPG and Blackstone.

The truth is that Intel has a terrific 401K plan. Yes, like many plans it could be better yet my sense is that their plan is in the top 5 percent of all plans. Some might argue that for a good look at a bad plan which should stimulate a legal action, one might examine that of the law firm Cohen Millstein. Me I’ll just say it is “interesting.”

Most remarkable about Intel’s plan is that they so openly disclose the high fees with respect to the private equity and hedge funds, what is called carried interest. Other plans do not openly disclose these fees.

Private equity and hedge funds are an important asset class that now control trillions of the financial markets and to not participate in this would not be prudent. For that reason you see leading endowments, foundations and public pensions with enormous participation in this area.

The real problem rests with the Securities and Exchange Commission and IRS inability to enforce the rules, rules that firms like Intel need to rely on being enforced. For this reason, even though perhaps a prudent decision in the spirit of 404C, such investment does not make sense given regulatory failings, in my opinion, which I highlighted to Intel management. That was the subject of my blog post that was used by the Oregonian and led to the action. The term I used was “subject to a class action suit,” knowing full well that it would be a nuissance suit.

Attention to maintaining a top quality plan is one reason why Intel is not only a strategic holding in my personal investment portfolio yet also for my clients. It speaks very well of the firm that, after I expressed my concern, they realized that despite their best efforts to diversify such participation, it made sense to outsource it to a financial firm and also add more choices than those available previous to my observations.

So here is what really happened.

In addition to looking for good investment opportunities in the health care area,  a related goal was to shine a light on hedge and private equity funds, in general, and focus on two things. They are price fixing of generic drugs and medical procedures and tax evasion in which private equity and hedge funds are using unusable tax deductions belonging to tax-exempt limited partners. Key players here are KKR, TPG and Blackstone. And their investors include your own CalPERS and what we call OPERS up here in Oregon. Attached is the December 2015 agenda for OPERS in which KKR made a presentation and once again referenced the investment in drug based cash flows. KKR manages billions for OPERS and CalPERS together.

Perhaps you have seen some of the controversy resulting from stories that originated in the NY Times regarding hedge fund managers buying specific drugs and immediately invoking dramatic price increases and related anti-competitive practices?

I laid this out to the NY Times in November 2014 yet it took almost 8 months for the first story to appear. Enclosed is an email from Gretchen Morgenson of the NY Times responding to this story idea in late 2014. In return for the story details I asked that my name not appear in the story. She collaborated with another NY Times reporter, Andrew Pollack, and have done amazing work. Regarding the tax evasion schemes, however, still nothing has appeared, which is disappointing.

Attachments:

1) Email to Oregonian reporter Jeff Manning in December 2013 outlining concern regarding Intel’s 401K plan containing hedge and private equity related investments. Jeff immediately passed this along to his colleague Brent Hunsberger. Note that “Larson” referred to in point 4 is an executive at Intel Capital.

Brent was still using an Oregonian newspaper email at the time, even though he had become a contractor and was working full time for a local investment firm. Several months later he then farmed out several of my observations for comment to other investment advisors and positioned me as providing a negative comment regarding Intel.

Fully plagiarizing my work was bad enough yet completely misrepresenting the nature of my conclusions was very poor judgement. After expressing my concern Brent did update his email address and add disclosures regarding his changed role at the paper.

A subsequent story at the Oregonian was done by Mike Rogoway which accurately reflected my perspective.

Again, my purpose was to first draw attention to the dramatic increase in hedge and private equity fund investment in retirement plans, both public plans such as Calpers and Opers and private plans including Intel’s. This could then lead to a detailed discussion regarding the appropriateness of investing in generic drug and medical procedure price fixing and tax evasion, as seen in KKR.

2) Oregon PERS Investment Council Member Keith Larson. Larson, who is also an executive at Intel Capital, was the past Chair of the $70 billion fund, prior to current Chair Katy Durant. At the time Oregon and California PERS were investing aggressively in private equity firms, including KKR, who were buying cash flows from particular drugs and medical procedures. My public comments reflected in the Oregon PERS meeting minutes go back to 2013 on this issue.

3) Tax evasion via gaming residency. I had hoped the NY Times would address this issue yet thus far they have chosen to only focus on the price increases and anti-competitive behavior of these funds. Key havens for these medical related schemes include Canada, the UK and Switzerland.

As major companies including Pfizer concoct corporate tax inversions to evade most US taxes, my strategy was to start local in order to generate awareness.

For this reason I asked the Times to confirm that the Chair of Oregon’s $70 billion fund, Katy Durant, is a full tax resident of the State of Oregon for tax purposes. When asked to confirm this, Durant declined. State Treasurer Ted Wheeler confirmed he was. Durant’s husband, Gordon Sondlund, a local real estate developer, claims Washington tax residency, a state, unlike Oregon, in which there is no state income tax.

4) Conclusion: The good news is that my plan has resulted in a major national discussion on drug prices, including Senate hearings. The bad news is that Intel has had its reputation impacted by this nuisance suit given they have an outstanding retirement plan.

Thank you for considering these thoughts.

All the best,

Bill Parish

 

 

 

Email from Jeff Manning, Oregonian reporter

 

Manning

 

 

 

The New York Times story on Intel’s 401K plan 

 

Intelmorgensonstory

 

 

 

Oregon Investment Council December 9, 2015 Meeting Agenda

 

OIC

 

 

 

Email from Gretchen Morgenson, New York Times reporter

 

Morgenson

 

The New York Times story on Drug Pricing

 Pollack

As an independent investment advisor with a background that includes previously having been a CPA and Chief Financial officer with extensive audit, tax and operational experience, it is particularly easy for me to provide substantive comments on political candidates financial disclosures, including investments and tax returns.

This work has been featured in leading publications including the Wall Street Journal,  New York Times, Bloomberg, the Los Angeles Times and the Oregonian.   I strive to be completely independent and provide the same focus regardless of a candidates political affiliation.

Gaining access to these reports can appear confusing and the purpose of this post is to articulate how anyone has access these reports given most major news stories review them yet do not provide a link to the source information.

On December 15, 2015 I called the Cruz campaign and asked why all the candidates financial disclosures appeared on the federal election commissions website except Mr. Cruz.  I had already obtained the report from another website yet an important question remained, why was it not on the federal website.

At the same time I requested that leading reporters from the NY Times, Wall Street Journal, Bloomberg and LA Times ask the question.  Finally the report was posted on December 17, 2015, after several Republican debates had already occurred.  Rubio posted his report on June 4th, Bush on August 21 and Trump on August 21.

Clearly, the FEC did not post it on the website because it was in dispute over particular disclosures.  And even after being posted on the site 12/17/2015 it still does not specifically note the salary for Heidi Cruz, a managing partner for Goldman Sachs whose firm has made a margin loan against the value of their securities to Cruz.

Other candidates, most notably Hillary Clinton and Jeb Bush, have taken intense criticism upon revealing their income sources.  Here in Portland the World Affairs Council would not reveal how much Clinton was paid for a local speech yet her tax return clearly indicated $250,000.  That was a big story here in Portland, that a tiny non-profit trying to encourage younger participation would pay such a fee and make ticket prices out of reach for many.

Ted Cruz has still not released any tax returns since 2010, which is remarkable.

Jeb Bush has released more than 10 years of returns and took similar criticism for a variety of issues.

Here is a direct link to the Federal Election Commission page that lists all candidates reports, both Democrats and Republicans.

http://www.oge.gov/Open-Government/2016-Presidential-Candidate-Records/

The following pages for Cruz, Rubio, Trump and Bush clearly indicate when the filings were posted to the website.  In Cruz case, December 17, after several debates, was the first time his filing appeared on the website.

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Warren Buffett has announced his largest buyout in history, the $38 billion takeover of Portland, Oregon based Precision Castparts.  This is almost twice the size of the Heinz takeover, one of his largest prior takeovers.

Heinz and other Buffett enterprises, including Burlington Northern and Pacific Power, are having a strong negative impact on the Oregon economy.

This includes potato farmers in Eastern Oregon who had a win/win long term relationship with Heinz cancelled, and local communities battling to prevent oil and coal from being shipped by rail thru their communities without adequate safety guidelines.

Burlington Northern receives more than one-third of its gross revenues from the shipment of coal and also carries more than 80 percent of the oil transported by rail in the United States.  Pacific Power’s primary source of energy is coal.

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Below is the link to a press release by Parish & Company in October 2005 which was provided to Berkshire Hathaway’s David Sokol and Warren Buffet for review.

Warren Buffett Dupes Intel with Ingenious Tax Scheme

In typical Buffett fashion, he is providing assurances to “top management,” what some might call insider dealing,  with inevitable devastating cost cuts to follow in mid management along with significant outsourcing to related companies and aggressive use of tax havens. Not to mention erasing long-term oriented shareholder gains as investors are forced to sell the stock.  One can also expect Berkshire Hathaway to use a related subsidiary to loan Precision funds at a rate significantly higher than market rates, that’s the Buffett formula.

The legal team representing Precision Castparts and its shareholders consists of Portland based Stoel Rives, the state’s largest law firm that was also intimately involved in Enron’s affairs prior to its demise, and New York based Swain Cravath, Swaine & Moore LLP.

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SEC Chair Mary Jo White’s husband John White is a senior partner at Cravath, Swaine & Moore LLP. Most large law firms are now living off merger and acquisition fees and those that are doing straight up legal work have been decimated from a loss of clients due to such consolidations.

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SEC Chair Mary Jo White              John White, Cravath Partner

As a former CPA and auditor I can attest that independence must be achieved both in “appearance” and “in fact,”   the most fundamental principle of auditing. That is a standard question on the CPA exam yet sadly it is impossible  for SEC Chair White to meet.

This is not some small merger or takeover but rather the biggest deal in Berkshire Hathaway’s history and one that will greatly impact the tax base in Portland, Oregon as jobs are cut and outsourcing accelerated.   Police, fire and school budgets will be greatly impacted.

The question is, how on earth are such inside deals between top management and takeover artists like Buffett being tolerated by the SEC?  Put another way, who is advocating for ordinary investors in Precision Castparts?  Remarkably, there has been almost no public discussion of this “deal” between top management at Precision and Buffett, expected to close in early 2016.

And where  is the SEC, the “Investors Advocate,” whose job it is to protect ordinary investors interests.  Granted, the workload for the SEC is staggering, and made more difficult by Buffett’s control of the media.  News coverage has in fact ceased largely due to Buffett’s enormous media clout, which includes his ownership of Business Wire, numerous newspapers and other media channels, not to mention vast advertising budgets capacity to influence news decisions.

White’s job at the SEC is difficult indeed.  For example, last month the Oregonian ran a lead editorial against the “fiduciary standard,”  openly challenging an important SEC initiative White is advocating.  Former SEC Chair Arthur Levitt, on the boards of both Bloomberg and the Carlyle Group, has called failure to establish this standard a “national disgrace.”

Buffett is clearly a political genius.  Rarely discussed is that his father was an influential four term Republican Congressman from Nebraska, who also chaired Taft’s Presidential campaign in the 1950’s.  No one could have started their career more politically connected.

And here in Oregon the joke is that he owns the State Legislature along with taking control of the Governor’s office with the ascension of Kate Brown after popular four term Governor, John Kitzhaber, was run out of office over a scandal regarding his partner’s advocacy of “clean energy.”

Hayes was not a state employee yet emails indicated she was actively acting as if she were. Of course this is nothing new for spouses of public officials.  What really put Kitzhaber’s demise on overdrive was charges against Hayes of tax fraud, specifically, not reporting her consulting income on behalf of clean energy non-profits.

These charges were completely made up and a gross breach of journalistic ethics given that Hayes released her 1040 showing net consulting income yet never provided a schedule C, which would show gross consulting income along with all her various expenses.  Reporters essentially took the net income amount on the 1040, compared it to publicly disclosed gross revenues from consulting contracts, and claimed tax evasion in several major front page stories and editorials.

How do I know this?  I was asked the by key journalist involved, as often is the case, to review the tax returns for major public officials.  In this case I was provided the returns by Nigel Jaquiss of the Willamette Week, completed the review, and clearly indicated there was nothing there.  Nigel followed up with a thoughtful analysis, highlighting net business income.  Sadly, other reporters at major publications then took this “net” number and compared it to the publicly revealed gross consulting revenues and ran major front page stories and editorials, almost on a daily basis, essentially charging Hayes with criminal tax evasion.

What never came out is the Kitzhaber and Hayes filed separate returns in which he used a local CPA firm and Hayes returns were “self prepared.”  Rather than give Hayes the benefit of the doubt and let the IRS do their job, as should be the case with any citizen, public or private, she was crucified in the media and remarkably no one came to Kitzhaber’s defense.

And once the new Governor Kate Brown stepped in, her first major action was to try and bargain away the “clean energy” bill for a transportation funding package.  And who would be the single biggest beneficiary, that’s right, King Coal Warren Buffett.

Bravo Warren!  You are amazing?

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Investment advisors like myself who walk the walk with respect to long term oriented investment rely on the SEC to function as the “investor’s advocate.”  That is all investors, not just takeover artists like Buffett who have never created anything but rather specialize in inside deals with top management, appeasing shareholders with a short term spike in the stock price and then gutting companies, as was done with Heinz, Burlington Northern and Pacific Power.

One could argue that this takeover should be denied on national security grounds given Precision Castparts key role in the aerospace industry and Buffett’s inability to manage companies in which true innovation is required.  Similarly, if the national power grid is a strategic issue, how can we rely on Buffett to make the key decisions required for security when all he seems to know how to do is gut companies and then thrive on corporate welfare.   And while he boasts about the cash flow Burlington Northern is generated, businesses suffer from gross neglect and related bottlenecks in the rail system.

In 2015 Buffett boasted in a front page Barron’s story that he and his Brazilian private equity partners made $22 billion in the first two years after his $25 billion takeover of Heinz.  Long term Heinz shareholders were stuck with a tax bill and dedicated employees and vendors were betrayed.  Buffett creates one debacle after another yet the media never seems to provide coverage.

Meanwhile here in Oregon the $80 billion state pension fund managers have said nothing about the takeover of Precision Castparts.  They perceive their role as narrow and only related to returns on portfolio investments.  One could argue however that the PERS system needs a strong tax base, in addition to returns on the existing portfolio.   A tax base being decimated by such takeovers.

Oregon PERS was the original large outside investor in KKR and has large investments in both hedge and private equity funds, including KKR, TPG and Blackstone.  These firms make tax evasion a science by gaming residency via tax havens ranging from the Caymen Islands to the UK.

It is ironic that the chair of the Oregon Investment Council, Katy Durant, has not clarified if she is a full resident of the State of Oregon for tax purposes, not only for W-2 wages but also investment income.   Perhaps that is where tax reform should begin, that is, full disclosure regarding tax residency for public officials and for publicly traded companies a footnote that summarizes actual taxes paid, the specific type of tax whether state, federal, property, etc.  and the years to which the taxes paid apply.  This would be great information for investors, advisors like myself and other stakeholders.  In addition, it would meet the spirit of the SEC rules.

A likely impact would be fewer takeovers of companies vital to the economy, like Precision Castparts, leading to stronger local schools and services and better long term returns for investors as tax receipts stabilize.  Put another way, go home Warren.  Enough of the “big con.”

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Sondland is a major real estate developer with numerous points of intersection with real estate investments made by the Oregon Investment Council.   He was also the most ardent opponent of a convention center hotel in Portland,  fearful it would compete with his existing properties, yet when the city finally crossed a legal threshold making it a reality, Sondland proposed that his firm handle the contract.

Even though private equity and hedge funds have produced poor returns for years, the Oregon Investment Council under has dramatically increased investment in this area under Durant with TPG, KKR and Blackstone being three of the primary beneficiaries.

 

 

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Disclsoure and Media Development Background:  Parish & Company maintains no speculative investments in the health care companies discussed and does not collaborate with any private equity or hedge funds.  It’s goal is to identify high quality health care opportunities suitable for long term oriented investment.

This effort includes providing high quality news material to leading journalists including Gretchen Morgenson of the NY Times, Mark Maremont and Rich Rubin of the Wall Street Journal, Joseph Tanfani of the LA Times and Margaret Collins of Bloomberg.

In doing its research Parish & Company has revealed a massive price fixing scheme, both in medications and medical equipment, being orchestrated by private equity and hedge funds, often financed by public pensions including Oregon PERS.   These firms purchase drug and medical equipment royalty cash flows and, in conjunction with the use of various drug and medical procedure distribution systems, including hospitals, specialized clinics and pharmacies, are price gouging patients and fleecing taxpayers via Medicare and Medicaid reimbursements.

In addition to anti-competitive practices that would result in quick DOJ actions in most industries, these firms are also aggressively using tax evasion to embellish financial results.

The purpose of this post is to provide a conceptual overview of the scheme for leading journalists to further their work in this area.   A related goal is to demonstrate that indeed one person can make a dramatic positive difference by revealing such issues via collaborating with leading journalists.  Already Congressional hearings have been scheduled.

The original analysis was provided to a few key reporters in the fall of 2014 with the expectation a story would be completed by December 2014, yet this was complicated by Bloomberg dismissing most of its leading investigative reporting staff and my favorite reporter at the NY Times, Gretchen Morgenson, being weighted down by a backlog of story material.  In reference to the analysis of investment firms purchasing drug cash flows and price fixing generic drugs, she did note  ” Thanks Bill. And thanks again for an illuminating conversation…sorry that my head is always spinning after we talk. You’re always way ahead of me.”

In order to help facilitate the story,  I began to publicly discuss the scheme on December 3, 2014 at the monthly Oregon Investment Council meeting.  See link to minutes and related audio file involving public comment questioning whether it was appropriate for public pensions to invest in such drug cash flow resulting from the sale of royalty rights to private equity and hedge funds.

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OIC meeting 12/3/15 Parish comment (See public comment at end of 3 page document)

OIC meeting 12/3/15 Parish comment audio mp3 (Full audio of testimony, approx 2 minutes)

It is amazing that medical equipment representatives from leading firms like Stryker are regularly in the operating rooms during procedures and appear to be compensated on commission based upon the volume of product sales.   Technicians yes, but commissioned sales reps? Two key areas where this should be a major concern are oncology and spinal procedures.  Hopefully this post will stimulate a close look at this yet to be publicly revealed practice,

This was followed by a January 2015 interview on Kink Radio here in Portland, the leading morning radio show.  This interview was generally about the energy sector yet I also made comments about Enron like accounting practices and its role in price fixing of generic drugs, specifically claiming that drug prices could fall sharply if this scheme were addressed,

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Kink FM Interview January 8, 2015 audio mp3 (5 minutes of audio)

One could easily criticize the NY Times for waiting nearly 8 months to do the first major story on this analysis yet they still beat Bloomberg and the Wall Street Journal.  Of course they must also be especially careful given the enormous financial stakes.

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Gretchen Morgenson, Reporter/Editor New York Times

Since Andrew Pollack and Gretchen Morgenson of the NY Times superb original September 20, 2015 report on Daraprim, a drug purchased by a hedge fund for which the price was immediately raised from $13 to $750 a pill, leading generic drug maker, Valeant Pharmaceuticals, has declined almost 70 percent, erasing more than $50 billion in market value.

Valeant was indeed one of the top holdings in many large hedge funds.  This superb story on Daraprim finally motivated the financial analyst community to get to work and realize that revenue increases at firms like Valiant were mostly resulting from what some call “price gouging,” an unsustainable model.

Here is the link to the NY Times story on Turing, the hedge fund that purchased the rights to Daraprim. Remarkably, the fund manager agreed to a video interview in which he tried to defend his actions.

Drug Goes From $13.50 a Tablet to $750 Overnight, NY Times, by Andrew Pollack 

Later in October of 2015 the NY Times also reported that a competitor would start selling the same medication for $1 per pill for bottles of 100.  Patients might call this sweet justice.

Drug Compounder Offers $1 Alternative to $750 Pill, Associated Press

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And while Berkshire Hathaway’s Charles Munger and Warren Buffett (In photo at right) are calling Valeant’s practices immoral,  one of its defenders, Bill Ackman (photo on left), is similarly calling out Munger on Berkshire Hathaway’s investment in Coke, calling it a key contributor to obesity and diabetes.  Neither Ackman nor Munger talk about their sizable investments in transporting coal and crude oil by rail and the related environmental and health/safety consequences.

Ackman is one of Canadian Pacific’s largest shareholders while Buffett and Berkshire of course own Burlington Northern, which receives a third of its gross revenues from transporting coal, in addition to transporting 80 percent of all oil in the U.S. that goes by rail.  Interestingly,  Bill Gates and his foundation are together the largest holders of Canadian Pacific railway, and are clearly trying to corner rail traffic in North America together with Buffett.

Already Canada Pacific has attempted to purchase CSX railway and, having backed away due to anti-trust issues, is now making a play for Norfolk Southern.  It is almost ridiculous that Warren Buffett is making billion dollar transfers to the Gates Foundation and then the foundation is using these funds to create a monopoly on rail traffic in North America.   Put another way, they are clearly related parties and the SEC should treat them as such.

Tax exempt public pensions should similarly think about whether it is appropriate for them to participate in monopoly generating activities in the health care grid.  Especially when these investments are using inversions and other schemes to deplete the very same general tax base necessary to sustain the public pensions.

I did also attempt to get some major coverage on this health care grid price fixing scheme in the LA Times as part of a review done on Jeb Bush”s financial statement yet was unsuccessful.  And while the market is focused on Valeant’s relationship with a “specialty pharmacy,” the best example needing more disclosure, in my opinion,  is Blackstone’s development of Catalent, which it merged into Vanguard Health Systems, which was sold to Tenet Healthcare, the nations third largest for profit health care company, on whose board Jeb Bush sat until shortly after the story was printed.

Here is a link to the excellent story by Joe Tanfani.  Unfortunately, the drug and procedure price fixing concept was too big to fit into the scope of the story, even though Bush made a fortune in gains from Tenet stock options, gains largely created by the roll-up purchase of Vanguard Health from Blackstone.   Consolidations done with tax-exempt public pension investment dollars.

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Jeb Bush                           Joseph Tanfani, LA Times

Jeb Bush, shifting focus, quits firm that has profited from Obamacare – LA Times, by Joseph Tanfani

Basic Premise Regarding Private Equity and Hedge Funds in Health Care:  Just as Enron spiked energy prices by shutting down key generation facilities on the power grid for unnecessary maintenance, private equity and hedge funds are purchasing hospitals,  specialized clinics and various other health care distributions systems and limiting access points through “roll-up” consolidations.  This is moving patients to higher cost choices, both in medications and medical equipment, often from related companies.

In understanding Enron, one could always rely on Ken Lay’s own words. ” We are going to be the Microsoft of the energy field,” he would say.  In practical terms he meant that they were using “financial engineering” to raise its share price and leverage growth in their stock options.

One key strategy was to hide debt in offshore entities, thereby strengthening its balance sheet.   The major debt now being hidden is taxes and all investors should ask, what if these firms had to pay a modest rate upon their various schemes being successfully challenged by the IRS?

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Ken Lay, Former Enron CEO

Of course Key Lay was known as “Kenny Boy” in the Bush administration, as he masterfully manipulated regulators, including the SEC, to prevent any real regulatory scrutiny.  Today PE firms like KKR are similarly manipulating key regulatory agencies and hiring the best political muscle money can buy.

Not only is former CIA director General David Petraeus on board with KKR for millions yet former President Bill Clinton has also made a fortune working for KKR thru 2014, a year in which he made $4.5 million working for one of KKR’s key portfolio companies, Laureate Education, a controversial for profit college company living off student loans.  Laureate paid Clinton $16.5 million over a 4 year period ending in 2014.

The irony regarding Clinton is that student loans and drug costs are positioning to be key issues in the 2016 Presidential campaign.

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Henry Kravis              George Roberts

Two Top KKR Promoters:

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Bill Clinton                      David Petraeus

Still unreported in the business press is that 70 percent of all carried interest earned by most major PE firms is paid in the form of stock options, see PricewaterhouseCoopers study posted on this blog.  And similar to Enron and Microsoft prior to the .com bust, PE firms are excluding the cost of these options from the valuation of their portfolio firms, thus greatly inflating their values and legitimizing “deal specific” carry fees they would not otherwise be entitled to.

See slide with PricewaterhouseCoopers summary.

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Health Care should present some terrific investment opportunities, especially in the basic delivery area, yet the level of fraud is currently simply staggering.  Step one should be to allow the government, since their are 45 million people in Medicare, to negotiate volume discounts and other key terms.  Remarkably, this was prohibited by Congress when prescription coverage was added.

Today Oregon PERS approved a $400 million investment in Stonepeak, a firm that invests in “infrastructure projects.”

In his presentation Stonepeak’s managing director Michael Dorrell noted their strategy is to invest in “essential infrastructure assets with an economic monopoly, much like an airport.”  This includes water, power plants, transportation and telecom with a focus “outside the auction process.”  They expect an annual return of 12 percent over 30 years.

One of their major projects he discussed is the largest desalination operation in the western hemisphere, in Southern California.  The key development partner is Poseidon Resources, “former GE guys.”  Dorrell noted they obtained the exclusive rights to such desalination projects.  They brought these rights over from their former employer Blackstone, who is entitled to 50 percent of the carried interest from this project. The expected return is 14 percent over 30 years and the City of San Diego could not do much about this high rate since Stonepeak has rights to the “only viable site near San Diego.”

In the old days government entities would issue municipal bonds for such improvements in order to make sure the public interest is served with respect to keeping costs down.  One might question why Oregon PERS is investing in such projects via private equity firms rather than directly funding them via a firm specializing in this area working with the municipality?

This also highlights why it is so important for Oregon PERS to fully disclose carried interest fees and partnership audit reports to the public.  Key questions regarding Blackstone’s participation in 50 percent of the carried interest from the desalination project were simply not asked.  They include noting whether Blackstone has other businesses independent of Stonepeak with a stake in the project,  etc.

Put another way, more disclosure of private equity and hedge fund fees is important, not only with respect to their own funds yet also in terms of how much these funds have allocated fees to outside supposedly independent firms like Blackstone, especially if they come in the form of stock options.  At a minimum, Stonepeak should update its SEC ADV filing noting that Blackstone has a material participation in its largest project.

Remarkably, one of Stonepeak’s principal equity owners, per SEC filings, is TIAA-CREF.  Given that TIAA-CREF is tax exempt, along with Oregon PERS and most of the other limited partners, its not hard to see why tax rates are going up for the rest of us.  The overall corporate tax base is simply vanishing behind tax exempt status.

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