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Posts Tagged ‘Private Equity’

Disclosure:  Intel is currently the largest single individual equity holding in both my personal and most of my clients’ portfolios.   No shares will be recommended for sale based upon this original research.

intelceobrian

Intel CEO Brian Krzanich

The purpose of this post, which will be accompanied with an email directly to top management, is to effect positive change and help Intel avoid an inevitable class action lawsuit by employees over mismanagement of its retirement plan.   Already Fidelity Investments itself and Massachusetts Mutual are subject to such lawsuits in which employees are claiming excessive fees and poor choices.  In both cases, employees are absolutely correct.

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With all the stories on Romney’s finances, many of which resulted from my observations regarding his tax returns and investment accounts, in particular his IRA, and the interaction of the trusts, foundation and Bain Company filings, the most important story is still untold.

Here it is, the story that could likely open the Republican convention to draft a new candidate.  I have been unsuccessful in getting a major reporter to tell the story, so I guess I’ll just have to tell it myself.

I’ll lay it out in simple steps with no conclusions or opinions.  It is simply astonishing that the media has not told this story.

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In a front page story Sunday May 20, 2012, Ted Sickinger of the Oregonian provided a detailed review of private equity valuation concerns.  This portfolio of opaque investments has grown substantially and poses unique risks to Oregonian PERS participants.  In his article, Sickinger notes this analysis is based upon original Parish & Company research.

Although an excellent article, there was still no mention that Oregon PERS does not keep independent records of “carried interest” fees paid to the private equity general partners nor K-1 annual partnership statements summarizing activity.  These private equity firms include Blackstone, KKR and Fortress. The fees cited in the article are for “management” and do not include the carried interest fees which are typically 10 times the annual management fee.

It is indeed remarkable that the Oregon State Treasury does not maintain these independent records.

Here is a link to the story:  Oregon PERS: Private equity investments pose unclear future

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Pulitzer Prize winning reporter and senior editor Mark Maremont of the WSJ wrote the following two stories, explaining how Presidential Candidate Mitt Romney built his IRA to as much as $100 million. Both stories were based upon original Parish & Company analysis.  The purpose of this analysis is not to directly disparage Romney but rather note that his conduct with respect to this scheme is worthy of discussion.

1) Bain Gave Staff Way to Swell IRA’s by Investing in Deals, Wall Street Journal, March 28, 2012

2) Bain Capital’s Unusually Young Retirement Rollover Age of 23, Wall Street Journal, April 2, 2012

The reason these stories are significant is that during Presidential Candidate Mitt Romney’s tenure at Bain, employees were able to use a special scheme, outlined in detail by Maremont of the Wall Street Journal, to put undervalued Bain related partnership investments into their SEP-IRA accounts, thereby going far above annual contribution limits afforded other taxpayers.   Some argue this is aggressive financial engineering while others argue it is outright tax fraud.  At a minimum it certainly has ignited a debate regarding fairness.

When Romney first ran for President in 2008 the law firm that handles his blind trusts, Ropes & Gray, also crafted a new pension plan for Bain Capital. Unlike the previous plan, the new plan allows the firm to hide the same scheme set up by Romney.   The problem is that this appears to be garden variety tax fraud in clear violation of important retirement plan rules.  A fraud enabled by one key provision, an official retirement rollover age of 23.

Bain’s use of an official retirement age of 23 essentially allows all existing employees, each year, to act as if they are doing a retirement related rollover from their profit sharing to IRA accounts outside the ERISA regulatory umbrella.  Of course, if I or most businesses had 23 as an official retirement age the IRS would laugh and shred the plan. (more…)

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Note:  Analysis of Bain Capital Profit Sharing Plan in Separate Post

A leading reporter recently asked me to take a look at Mitt Romney’s 502 page tax return.  What resulted was a fascinating journey that will hopefully initiate a common sense dialogue on needed tax reforms.   Newt Gingrich’s return was also analyzed, yet revealed no substantive tax policy issues.

To be clear, I am a strong critic of large private equity and hedge fund “buyout” firms.  To me they are clearly no more than sophisticated tax deduction pyramid schemes.   Others might argue they are the very definition of crony capitalism and via “club deals” are creating abusive monopolies that are destroying open markets.

That said, it is also true that these large private equity firms pay very close attention to my work and jokingly refer to me as Sherlock’s Sherlock when it comes to financial analysis.  So here we go.

Photo of Mitt Romney and former Sprint CEO Bill Esrey

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Note:  Mitt Romney Tax Return Analyzed in Separate Post

As an investment advisor I have found reviewing a company’s pension plan to be a good indicator of the sponsoring company’s quality of management.  These pension plans are all available for viewing at http://www.free5500.com via required  annual 5500 ERISA filings.  The filings show not only show total assets yet also investment vehicles used and key administrative rules.

What follows is an analysis of Bain Capital’s 2010 Profit Sharing plan, a plan that likely explains how Mitt Romney so effectively built his IRA into a balance some speculate could be as high as $100 million.

What they appear to be doing is using a “common collective trust” account at Merrill Lynch that likely has Bain Capital partnership related investments contributed at artificially low prices and then rolled out into IRAs each year by participants.  This explains in part why the current plan is so small in terms of total assets, it is essentially being flushed each year.  In 2010 almost a third of the entire plan was rolled into IRAs and the plan document does indeed clearly state that participants are entitled to do one rollover each year.

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The following letter was sent to SEC Chair Mary Schapiro and IRS Commissioner Doug Shulman on “tax day” with the hope they will jointly work at restoring the integrity of cash flow statements, without question the most important analytical tool for investment advisors like myself.  It is simply astonishing, given their material nature, that listed companies are not fully disclosing purchased and accumulated net operating losses nor the impact of complying with the “fractions rule” in the case of private equity partnerships.

 

Parish & Company
10260 S.W. Greenburg Rd., Suite 400
Portland, OR 97223
Tel:(503)643-6999 Fax:(503)293-3507
Email: bill@billparish.com

April 15, 2011

Mary Schapiro
Office of the Chairman
Securities and Exchange Commission
Mail Stop 1070
100 F Street NE
Washington, D.C. 20549

cc: Elise B. Walter – SEC Commissioner
Troy A. Parades – SEC Commissioner
Robert Khuzami – SEC Director
Doug Shulman – IRS Commissioner
Heather Maloy – IRS Commissioner Large Business Division
Walter Harris – IRS Director Financial Services
Elise Bean – Congressional Oversight Committee

Dear Chair Schapiro,

In 15 years as an investment advisor I have always done my best to support the SEC’s work, having led many key corporate governance related initiatives. Past Chairs Levitt, Pitt and Donaldson are all familiar with my work, which has also been reported in front page stories in leading publications including Bloomberg, the New York Times, Barrons and USA Today.

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