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Posts Tagged ‘Buffett’

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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.

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