Bobo Discusses Whose Shirts He Wears With The NY Times

1) It is interesting to me that a big name like yourself is in any way interested in the trials and tribulations of a small Midwest MREIT, smaller than many or most public companies on the NYSE. Who knew that such an obscure company in such an interstitial industry could garner such scrutiny, and that further, an anonymous Internet poster would be the object of such flattering interest by the big names in the NY financial media?

My scorn for the shorts' position in NFI was based upon the utter lack of accurate predictive ability of the primary claims from that camp for almost half a decade. For 5 years they had been claiming that everything and everything would be the company's demise. They had been universally incorrect for that entire period. If you are aware of anyone, short or long, who predicted that the company would do a 180 degree about-face on their core business plan, and change from having a dividend-centric REIT philosophy to one that essentially stopped creating any taxable income (and thus, REIT-mandated dividends) for the next 4 years, I'm all ears. Cite your source and their prediction. There is no such animal. The company's choice to do so was a complete surprise to everyone following the company, including the analysts whose vocation it is to call these correctly, as well as noted smart money like Dremen and Babson. So I suppose I am no better at this than the professionals and billion-dollar fund managers chartered with being better. We all got caught by surprise.

The criticism heaped upon the company previously was provably in error. If your position is that criticism, incorrect as it was, is a proxy for being correct about predicting this elective change in plan by management (and subsequent price drop), then there could well be merit to the idea that "the shorts were right." I tend to ask questions like, "Where and when, specifically, were they right, if your position is that they were?"

And frankly, given the massive level of put option action for the 40 days prior to this announcement, my instinct is to ask, "Who knew about this upcoming blockbuster about-face, and when, and how?" Have you turned your investigative lens on that question? Since you are obviously aware of the story, does it give you pause that tens of millions of shares of put options were bought in a compressed timeframe with no company-specific news or visibility? Or was that just lucky, as was David Rocker's serendipitous purchase of massive puts just a week or two before the WSJ issued its wildly destructive article of April 12, 2004?

FWIW, I didn't see that kind of massive put buying in other sub-prime players during this December to February 07 period, so it wasn't sector fears. It has the appearance of being remarkably company-specific. Why do you think that is?

As to those who you say claim I "led investors astray," who are these folks making these claims, and where are they claiming this, specifically? And how do they claim I lead them astray? The nfi-info.net website, which for the last two years was not operated by me, always had a policy that it would change any info that was in error - all one had to do was notify the webmaster. There were virtually no requests to change anything, much of which was contributed by experts in the MREIT field like Hhill. So was their analysis in error? If so, how? And why didn't any of the sentient shorts use that offer to amend or correct to their advantage, and mount their counter, and warn investors (presumably saving them via this information exchange), if that was required - beyond the pages of disclaimers the company puts out articulating every and any real or possible risk?

 

I would challenge you, or anyone, to locate where I advised folks to buy NFI. I don't dispense investment advice. If I did, it would be worth what any advice from an anonymous Easter Bunny would be worth - what you paid for it. I indicated that I thought it was a good investment, and that I was invested in it. I did, and I was. IF someone claims I led them astray, I would ask, "Who, how, and where?" If publishing my opinion as to the company's prospects is leading folks astray, then everyone on the message boards has done the same thing.

 

I would say that guys like Greenberg, who were advising that the company was a precarious play when they were trading at $12 post-split adjusted prices, 4.4 years ago, BEFORE they had paid $20 worth of dividends, is more guilty of leading investors astray than I. Anyone deciding to short based on their "warnings" would have lost all their money, and been irretrievably underwater to the tune of a couple hundred percent today, even after the precipitous drop. Did he lead his followers astray? If so, have you sent him the same questions? If not so, how are my opinons different, other than that I am not published and ostensibly endorsed by a major media outlet?

What legitimate criticism of the company did I squelch? Be specific. I haven't been active in the NFI-Info website, as I stated before, for several years. So where, and how, precisely, did I "help squelch" this legitimate criticism? By what mechanism did I "squelch?" What did the squelching consist of? And what was the legitimate criticism? Again, be specific. Your embedded assumption is that, A) There was legitimate criticism (whatever that was) issued by someone, and B) that I squelched it, or helped squelch it. So why not clarify what that "legitimate" criticism was? And how I "helped" "squelch" it? For years, I rebutted claims that the company was a Ponzi scheme, that rising interest rates would result in a deluge of defaults that would crush the company, that competition would ruin them, that the lawsuit would be their end, that credit deterioration would bury them, that they would be BK by 2005, and then 2006, and then 2007. All incorrect. So are those what you are referring to? If not, what? And does countering specious claims with fact and opinion constitute squelching? Or merely "helping" squelching, whatever that one-step removed assistance in an ambiguous action would be?

Again, your embedded assumption appears to be that because the share price plummeted due to a change in management's direction, entirely elective, and entirely unforeseen by any of the analysts or experts, as well as to their first bad quarter in 5 years - that all or most or some criticism, non-specifically assumed as being valid, was in fact valid and predictive, and that further voicing a contrary opinion was "helping" "squelch" "legitimate criticism."

I would argue that is a long, long stretch, even for a practiced and high-profile wordsmith and raconteur with as august a pub as the NY Times.

2) Second, what is your reaction to the SEC's announcement a few weeks ago that it had given Gradient a clean bill of health?  do you think this hurts Overstock and Biovail's civil actions?  Do you think this speaks to what you might view as the cravenness of the agency?

The SEC's announcement via letter of its decision to terminate the Gradient investigation is mystifying, given that the Commission typically does not issue similar letters for public companies that are its responsibility, preferring to allow the stigma of an investigation to linger for years. That it issued a letter to a private company, after the subpoenas that would have proved or disproved the allegations of the affiants (sworn, under penalty of perjury, as true) were "squelched" by Cox, is odd, to say the least. How did they then investigate this sworn testimony claiming wrongdoing? Did they investigate whether the reporters who were claimed to have been on the line while the hedge funds were conspiring, working to time the ugly reports, were in fact on the line? If so, how did they investigate? And what did they find? Were the reporters on the line, or not? If so, did the SEC decide that wasn't enough proof? That short of a tape recording of reporter A cackling with approval as hedge fund B declared he would make millions when the researcher published its spoon-fed lies surfacing, it was impossible to know anything with certainty? OR did they discover that it was all a lie, and invention by the affiants? In which case, why aren't they being prosecuted for perjury? The stink emanating from this investigation is rather reminiscent of the one emanating from the Aguirre matter, wherein Grassley and Specter found that the Commission was either grossly incompetent to investigate, or was corrupt and obstructing justice.

What is your opinion, knowing that? Does the decision by an agency publicly called incompetent or crooked by the Senators who investigated it recently, to drop an investigation (of unknown intensity and thoroughness), mean anything besides that its legacy of incompetence or crookedness is intact? If so, what does it mean, and why? I would think that you, as a name journalist, would be asking the same sorts of questions - how did they investigate the claims? Were the claims false? How do they know they were, or weren't? What steps were taken to verify them? Why was pursuing the journalists in question, as authorized by the investigation team, quashed, and by what alternative mechanism was their involvement or lack therein verified? How did the SEC determine whether the hedge fund(s) in question in fact did or didn't do what it is claimed in sworn testimony that they did? Did they ask the hedge fund, and then accept the answer at face value, as they did in the Pequot matter? Is that what the "investigation" consisted of? If not, what did they find with the hedge funds - were they on the line, and IMing, and emailing Gradient constantly? Or not?

Without knowing the answer to these questions, I maintain it is absolutely impossible to know what any of this means - whether the SEC did in fact do their job (we can't just assume they did in light of the Aguirre/Senate revelations), and whether their decision to drop the investigation was based on political grounds (the hedge funds and reporters had too much "juice") or sound investigative grounds. I don't know the answer to that. Neither do you. I know I don't know what it means.

Wall Street has a long and colorful history wherein stock manipulators gamed publicly disseminated information to promote their agenda, both long and short. Let me ask you a question: Do you have any reason to believe this is a thing of the past, and doesn't go on every day now? If so, how do you know what you believe to be true - why would the last 100 years of Wall Street history have reversed itself, and why would big money and huge power suddenly behave differently? Because of the awesome and terrifying fury of the SEC? An agency that routinely allows "without admitting guilt" settlements of fractions of pennies on dollars for misbehavior, and which can't even tell you how many, if any, of the fines they levy are paid? Who is too incompetent or compromised to handle a similar investigation into another hedge fund?

Please.

I think that discovery and the plaintiff's bar will do a thorough review of the actual facts and data in the cases, and will determine what actually happened. Discovery will show what it shows. That will determine the strength of the claims. An agency with zero credibility left choosing not to pursue an investigation has little weight with me, although I'm sure that the defense counsel will try to get mileage out of it. Their level of success will be predicated on the facts arising from discovery. Neither of us knows what those are. I do have hopes that a FOIA request for info on the matter will give us illumination as to the thoroughness of the SEC's investigation.

At this point, if the SEC hasn't prosecuted the affiants for perjury, I would guess that they did a cursory review, couldn't easily prove or disprove anything, and gave up in search of lower-hanging and less-politically-charged fruit. I have seen nothing to disabuse me of that belief. I will be following the cases, however, with some interest.

3) Finally, I wanted to get your reaction to the utah legislature's decision to rescind the "failure to deliver" law it had passed last year.  A travesty?  Or not?

Last year, a law was passed, 27-1, by lawmakers who heard testimony about the bill, and who evaluated the merits of the bill. That law required that transparency as to who is taking a buyer's money, and then refusing to deliver the product paid for, be created at the state level. The brokerage industry then launched a massive lobbying and PR campaign to stop that from happening. Which is funny to me, as it also has a large PR campaign going to assure everyone that the delivery failure issue isn't a big deal.

And yet it is big enough to do the full court press to stop a state from passing a sunshine bill. The irony and logical inconsistency is not lost on me.

This year, a Senator whose fortunes were lackadaisical at best prior to introducing the bill, suddenly had a change of heart, concurrent with a reportedly remarkable surge in his prospects. Why this good man chose to do a complete 180 on his wildly popular and overwhelmingly affirmed law is a matter of speculation. Have you investigated whether there could have been undue influence at work? Again, the history of politics is of ugly backroom deals and influence peddling at a staggering scale, so have you looked into any possible connection between the SIA's lobbyist, the good Senator's booming new business success, and his come-to-Jesus turnaround on his bill? Not that politicians can be bought off, or anything. But have you devoted any time to looking? I can understand why you might be too busy, but given that you are willing to take the time to solicit the opinion on the topic of a minor Internet personality monickered after a holiday rodent, I would have thought that you might be interested enough to do some heavy lifting to discover any meat to the story, other than that put out in soundbites by the PR machine.

The bill had a perceived flaw, which this year's Arizona bill corrected, notably that it required reporting over and above that required by the federal apparatus. That could have been corrected in Utah with a one line revision, as it was in the Arizona bill text. That was the entire basis of the SIA's contention that it violated federal rules - that it imposed onerous NEW reporting requirements. Arizona only required that the brokers copy the state on the EXISTING federal reporting, constituting no new reporting requirement, merely a "CC." I liked that approach as it neatly overcame the SIA's objection. Instead of making that minor change, the Senator chose to pull the bill. Why is unknown beyond the soundbites. I find it deeply troubling that nobody has looked into this, however entirely consistent with the selective vision with which the NY financial press approaches topics that are adverse to the interests of Wall Street.

Joe, in keeping with my historical policy, I will post this exchange on the Sanity Check website, so that my fans and critics can have an accurate record of what was asked, and answered. I find it an appealing idea that both sides of exchanges are viewed by the folks at home, as it keeps everyone honest - in the spirit of journalism's highest aspirations. I hope that isn't troubling for you - contrary to some accounts and views, I have never had any problem having the whole interaction in any of my interviews published. It has always been the pro press that has a hard time having their queries made public, amid claims of persecution and bullying. How publishing questions and answers is intimidation or bullying is unknown.

Good luck with your column. Feel free to touch base if any of this seems ambiguous or unclear. I tried to answer as comprehensively as I could in the limited amount of time I have.