Falcone's SEC Charges: Bad Behavior, But Illegal?

The Securities and Exchange Commission today charged hedge-fund manager Phil Falcone with a profusion of misdeeds, from lending himself $113 million to pay his taxes to engineering a nearly perfect short squeeze in the bonds of a troubled Canadian plumbing-supply business.

My colleague Nathan Vardi describes the charges, as well as SEC Enforcement Chief Robert Khuzami’s condemnation. Falcone’s behavior, Khuzami said, resembled  “the final exam in a graduate school course in how to operate a hedge fund unlawfully.”

I’ve read the complaints and have just a few observations:

1. The bad behavior here was in an offshore hedge fund open only to sophisticated investors. They presumably knew Falcone wouldn’t run his Harbinger Capital like a Vanguard mutual fund. The SEC isn’t accusing Falcone of stealing money, but just moving it around in ways that may or may not have violated the fund’s rules.
2. The SEC accuses Falcone of lending himself $113 million to cover his tax bill in 2009 without properly notifying investors. But he has a powerful defense in the form of an opinion from an outside law firm that he could do it. The SEC says that’s a smokescreen to cover up his illegal activities, but the agency will have a tough time proving Falcone knew it was illegal if his lawyers told him it wasn’t.
3. The SEC says Falcone could have sold assets to pay his tax bill or taken a cut in his expensive lifestyle, but the complaint also says he thought he would have a taxable loss in 2009 to reduce his debt to Uncle Sam. Good for him he made money that year, but can the SEC prove it was unreasonable to expect 2009 would be as bad as 2008?
4. The claims refer to how he did things without the proper approval of, or by misleading Harbinger’s directors. Those directors were “two Cayman Islands residents” who, if thisFinancial Times story detailing the hundreds of hedge funds some Caymans directors represent is correct, might not be the best bulwark against management misbehavior.
5. The loan, whether or not it was improper, was twice collateralized and repaid in full. So the SEC must argue investors lost money because the interest rate — 3.66 — was too low. Harbinger apparently borrowed money at 7% from outside lenders at the time.
6. The claims regarding the Canadian plumbing-supply company, MAXX Holdings, may be legitimate but they are also fun to read. Falcone’s sin, according to the SEC, was to get mad at Wall Street banks who sold him MAXX bonds while simultaneously shorting them, without any sure way to get the bonds back. Falcone bought up the available supply — plus more bonds that had been sold short in excess of the supply –  and transferred them to a custodial account at a Georgia bank so they couldn’t be lent. Then he demanded delivery. The banks couldn’t get the bonds, a short squeeze ensued, and Falcone got his revenge.
7. If anything, the SEC complaint serves as an illustration of why hedge funds are mispriced. The allegations that Falcone manipulated the lockup period, granted preferential access to some of his investors over others and generally made life miserable for his investors after he failed to follow up on his big score in the mortgage market shows why hedge funds should earn much, much more than than mutual funds and other more liquid investments. Closed-end funds trade at a discount to open-end funds for a reason, and hedge funds run by mercurial traders who can choose when they return their money to investors need to generate much higher returns to justify the risk.

This Is What Happens When A Billionaire Tries To Get On A Plane With $1 Million Cash In His Luggage

For us, the everyday travelers sitting in economy class, checking luggage can be a somewhat nerve-wracking experience. Will our bag split open, revealing an embarrassing heap of rumpled lingerie? And forget allowing a baggage handler near your jewelry or iPad: we tend to stuff our valuables in our carry-on luggage.

Well, meet Christo Wiese. The 70-year-old is South Africa’s third richest person, worth $3.1 billion thanks to his shares in the African continent’s biggest retailer, low-price supermarket chain Shoprite.

Wiese’s travel woes couldn’t be further from the quotidian vanishing iPod. He’s facing a legal fight to recover over $1 million confiscated by customs officers because he was traveling with that huge sum in cold, hard cash bundled up in rubber bands in his luggage.

As the UK’s Daily Mail reported from London’s High Court, the billionaire tried to board a flight from England to Luxembourg in 2009 with two checked suitcases and one carry-on bag stuffed with a combined £674,920 — just over $1 million — in bills.

Says the Mail:

Dr. Wiese explained the money came from diamond deals in South Africa in the 80s and 90s, and had been kept in a safety deposit box in the Ritz hotel because of foreign exchange restrictions in his homeland, lawyers for the UK Border Agency said.

The UK justice system didn’t buy this explanation. A judge ordered that the money be seized under the assumption that it must be the proceeds of crime given Wiese’s unorthodox transportation method.

Wiese is now appealing this decision. His lawyer justifies his $1 million travel stash as completely in line with his vast wealth. As the Mail reported from court, barrister Clare Montgomery said: “The amount of money was consistent with Dr. Wiese’s stated wealth, representing less than two weeks’ income and a minute fraction of his assets.”

For the rest of us, two weeks’ income might amount to a few thousand bucks if we’re lucky. For Wiese, it’s the equivalent of a New York condo, all squashed into three suitcases.

Sheryl Sandberg Named To Facebook Board. Finally.

Sheryl Sandberg, the fifth most powerful woman in the world, Silicon Valley’s most-watched female and Facebook’s COO, has been named the first woman to the company’s board of directors after four years with the company. 

She joins CEO Mark Zuckerberg and six other board members that include Adreessen Horowitz’s Marc Andreessen, James W. Breyer of Accel Partners Reed Hastings, the chairman and CEO, Netflix and Founder’s Fund Peter A. Thiel, among others. Marketwatch reported and Facebook confirmed this news with FORBES this afternoon.

Given the pressure that’s been on Facebook to increase diversity on its board, Sandberg’s appointment does not come as a total surprise to the tech community. Women are a significant minority among those employed in technology jobs. Although women comprise 48% of the U.S. workforce, they hold only 24% of science, engineering, technology, and math positions, according to government statistics. As my colleague Larissa Faw noted recently, this imbalance means the few high achievers, such as Sandberg, are viewed as both an inspiration and as outliers, making today’s news even more compelling.

In the lead-up to the company’s spring IPO, pressure on Facebook to increase diversity on its board began to mount and my colleague Connie Guglielmo took note of a rash of protests. Ultraviolet, a community of women’s rights activists, protested outside Facebook’s New York headquarters in March and submitted a petition signed by 53,000 people collected in under 48 hours asking Zuckerberg to add a women to the board.

But while Sandberg’s appointment is certainly positive news, it does cast a light on the continued gender imbalance on the boards of some of Silicon Valley’s most popular and influential firms. By Guglielmo’s count Adobe Systems, Pandora, Zillow, Zynga and Splunk’s boards are no-girls-allowed,  while Apple, Groupon and LinkedIn have only one woman board member.

“Sheryl has been my partner in running Facebook and has been central to our growth and success over the years,” said Zuckerberg in a statement. “Her understanding of our mission and long-term opportunity, and her experience both at Facebook and on public company boards makes her a natural fit for our board.”

Before joining Facebook, Sandberg served as vice president of Global Online Sales and Operations at Google, and held a position in the Clinton administration, serving as Chief of Staff for the United States Treasury Department. In addition to Facebook, she serves on the boards of The Walt Disney Company, Women for Women International, the Center for Global Development and V-Day.

As reported by TechCrunch, Sandberg will have her own vote in all company matters, meaning she won’t be voting to represent anyone else—whether chief executive Mark Zuckerberg or other shareholders.

Why Google's New Tablet Could Be The iPad's First Real Competition

Google is just a couple of days away from debuting a new tablet that could finally shake up a market utterly dominated so far by Apple’s iPad.

Reports from Gizmodo and others say Google is likely to introduce the diminutive 7-inch tablet at its Google I/O developers conference (whose Wednesday keynote I will be covering live here). The kicker, according to the reports: The tablet, built by Asus, will start at $199 for an 8 GB of memory, up to $249 for a 16 GB version.

Amazon.com’s Kindle Fire already plowed this pricing ground, of course, so such a tablet wouldn’t be entirely new. But while the Fire has been reasonably successful for Amazon, it hasn’t made much of an apparent dent in the iPad because of its limitations, including a somewhat app platform controlled by Amazon itself. And the Fire doesn’t run a standard version of Android, making it tougher yet for developers to do apps for it.
Let’s not forget Microsoft‘s coming Surface tablet, either. But the reported pricing on that device, introduced last week, sounds quite close to the iPad’s. So unless it’s significantly better, which seems doubtful, it seems unlikely to mount a serious challenge.
But Google’s tablet, assuming as Chairman Eric Schmidt has promised (and this is a very big assumption) that it performs well, could for the first time challenge the iPad. And it would come at a time when tablets are the focus of everyone in tech from chipmakers and hardware manufacturers to app developers to marketers and publishers hoping to capitalize on a new mobile Internet device that could give them the creative canvas to rival (or exceed) the appeal of television and magazines. Here’s why Google might have a hit this time:
* It’s cheap. Now, merely being cheap won’t guarantee people will buy it in sufficient numbers to matter. But at $199, it doesn’t have to be every bit as good as the iPad. As Clayton Christensen has noted in cases dating all the way back to the transistor radio in the 1950s, a rival can most successfully challenge an established incumbent not by matching it feature-by-feature, but by offering something good enough for most people for a lot less money.
* The rock-bottom price will attract more app developers. If it’s decent enough to sell a lot thanks to the low price, that suddenly makes Android a more attractive platform for app developers. One of several reasons the iPad is the most popular app platform is that Apple controls the operating system version so developers don’t need to rewrite an app for each device running different versions.
Android is so fractured that it has been too much hassle for many developers to bother creating several versions of their app to run on devices running various Android versions. But all it takes is a hit product using the latest version of Android that sells in the millions–admittedly, not an easy goal to meet–to create that single standard that would help make Android apps a must for developers.
Of course, there are many reasons why this tablet, assuming it does indeed materialize (and today, that’s not a sure thing), could fall flat. Google’s record on its own hardware is poor, between the ill-fated Nexus smartphone to the Chromebook cloud notebook. And it has to overcome a considerable backlog of skepticism by developers about Android.
What’s more, Apple no doubt has some pricing tricks up its sleeve, so it could come out with a cheaper tablet. Given Apple’s brand and quality control, it needn’t match Google’s price–just get a little closer–to keep a not-as-good $200 tablet at bay.
Not least, depending on which features it sports, Google could end up mostly battling the Kindle Fire, leaving Apple’s iPad to remain popular even at a much higher price.
Still, it seems likely that before too long, Apple will face the first serious challenge to a device on which much of its future success depends.

iPhone 5: Every iPhone Accessory You Own Just Became Obsolete

Do you own anything that plugs into the bottom of your iPhone? An extra charger? An expensive dock? An iTrip? Anything else? Tough luck – its days are numbered. Techcrunch is reporting that Apple is working on a new 19-pin adapter for the iPhone 5, replacing the old 30 pin connector the company has used since the third generation iPod.
According to Techcrunch:

The connectors offered structural stability when connecting to most accessories but it’s clear – especially with the introduction of the MagSafe 2 port – Apple is more concerned with space savings inside each device.

Looking back on it, it’s sort of amazing that Apple held on to the connector for as long as it did – the company moves fast with upgrades to all of its products, and yet that standard connector has remained consistent for generations of new gadgets. It’s led to a proliferation of iPhone docks around the world – docks that, with the new iPhone 5, will be on their way to obsolescence.
There will be a fleet of new new iPhone accessories available when the new phone comes out, and anyone dedicated enough to wait in line for a new iPhone on launch day isn’t going to waste time upgrading. The environment will suffer, like usual, but expect accessory manufacturers to make a mint after an uncomfortable transition.
This was most certainly coming, and there was never any reason to expect Apple to hang onto the same adapter for more than a decade. And somebody will make a 19-30 pin adapter, but we’re still going to see the industry move towards making everything for the new iPhones rather than the old ones. I bought an iTrip when I went on a roadtrip to a music festival eight years ago. It’s worked for me ever since. Next time I want to upgrade, I suppose I’ll have to say goodbye.

Ed. Note — the original version of this article did not mention a 19-30 pin adapter.
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How Facebook Can Avoid Being The Next Yahoo!

Which new media platform has rocketed to hundreds of millions of unique visitors, provides both utility and entertainment for the masses, and has become the destination of choice for its generation? If this were 1999,Yahoo! would be your answer. Today, that torch has been handed toFacebook. And with good reason, since they have embedded their ubiquitous social network of nearly 1 billion members into a large part of people’s lives and the digital ecosystem.

But Yahoo!’s challenges tell a cautionary tale for Facebook. Yahoo!’s  unique attributes have been effectively copied or supplanted in a world whereGoogle dominates search, content becomes ever more specialized and fragmented, and email no longer draws people in as they access their messages on ad-free smartphone apps. In fact, Yahoo has seen US monthly uniques drop from 100 million to less than 85 million uniques per month since last summer according to Quantcast and revenue trend in the same direction, as their role as portal has diminished.

So what can Facebook learn from Yahoo!’s fate? Ignore your clients at your own peril. Other pundits and analysts are talking about Facebook’s need to innovate on mobile, so I’ll leave that to them. Here are some choices Facebook must make to its core business, in terms of how it supports its clients in the next 18 months:

• Cater to advertisers that help create legitimacy, or change the business model. The media business has always served two masters – the audience and the advertiser. Facebook seems to think they can focus on the requests of the masses, vs. the biggest brands (and budgets) when it comes to paid placements. If they plan to continue that approach, they should recognize that their paid media will only come from transactional marketing efforts, like direct marketing campaigns, and that agencies will make the lion’s share of the engagement revenue.  Instead, Facebook should partner with the most influential marketers to define an experience that elegant serves the business and the audience.
• Develop in-house teams that can charge for helping brands succeed with engagement. If the goal is to remain focused on paid ‘engagement ads’ and otherwise let brands do their pages on their own, Facebook should build engagement teams that can advise – for money – how brands can drive the use of the platform for brand immersion. Rather than let the agencies walk away with that business, Facebook needs to align with them strategically, and help them optimize the experience for brand marketers. Clearly, Oracle andSalesforce.com recently got religion about how to capitalize on social, on the back of Facebook, with the acquisitions of Vitrue and Buddy Media, respectively (see my colleague Melissa Parrish’s take on those deals here, and a call fromShiv Singh at Pepsi on the rise of social suites).
• Design an ad-supported interface on the brand pages that allows advertisers to be creative. Facebook is both too plain and too rigid for the creative teams that support most brands. While this keeps things clean, it limits the effectiveness of the advertising they are building their business on. If the user experience on the Wall is sacrosanct – arguable since they have complicated the algorithms and clutter on that page – then they need to enhance the brand experience for those that “opt in’ for brands to appear on their wall. Forcing people into the Timeline structure challenges brands to develop a new brand or campaign platform, especially one that is hard to differentiate visually.

Yahoo!’s revenue is in decline, and their management shake-ups are due in part to a lack of clarity of what they are versus what they should be. Is Facebook a media platform? A consumer utility? Or something else? Either way, they need to listen to both of their customers, or someone will rise in their place the way they supplanted Yahoo! (and MySpace, and Friendster, and others).

For LeBron James, Ring Worth At Least $10 Million

King James is now truly the king.

NBA Most Valuable player for the third time, MVP of the Finals and of course, his first championship ring. Figure a good chance of an Olympic gold medal this summer, too.LeBron James has answered the critics, playing with focus, controlled zeal, his eye always on the prize. When his Miami Heat trailed Boston three games to two in the Eastern Conference Final, he exploded for 45 points and 15 rebounds for a huge road win that kept his club’s march to the title alive. Efforts like that are what earn fans’ admiration. Even those fans that aren’t predisposed to like you. And sports marketing experts say he’s about to cash in big time.

“Expect to see a lot of LeBron in the next month or two, in ads, on talk shows and in London,” says Bob Dorfman of Baker Street Advertising in San Francisco.

While he’s considered polarizing – disliked by a large swath of fans who didn’t like the way he handled his “decision” to switch teams two summers ago – LeBron still rakes in about $40 million annually in endorsement money. He ranked first among team sport players on Forbes’ recent list of highest-earning athletes, and fourth overall. Yet Dorfman figures that James could easily add to his endorsement dough by $10 million or so.

LeBron has the good fortune of winnng his first ring in an Olympic year. The 2012 Games, Dorfman thinks, provide the perfect platform for leveraging the new and improved brand brought on by the new NBA hardware. “He will likely be featured even more by his sponsors during the London Games,” he says. In addition to Nike, State Farm and other blue chip brands, Dorfman figures there’s room for LeBron to expand to financial institutions, autos and more -  if he chooses. And if the price is right. As Dorfman puts in: “You better have at least seven figures to offer.”

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