Banking Elite Prey on Gullible and Greedy Investors and Bestow Great Riches on Themselves and Their Managers

Goldman Sachs has been nicknamed "Government Sachs" as the epitome of the "revolving door" between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman's former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On November 21, 2014, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify. [Source]

A new round of financial scandals in the early 2000s led Congress to pass the Sarbanes-Oxley Act in 2002 to rein in the worst excesses of earnings manipulation and fraudulent accounting behavior by corporations. The law strengthened corporate governance rules and prohibited auditors from involvement in consulting activities for their clients. Many have argued that these new rules provided incentives for companies to be taken private, an opportunity that private equity firms were quick to cash in on. Private equity firms also benefited from the ongoing trend in financial deregulation, which continued despite the financial scandals and dot-com bust of the late 1990s. Congress, for example, refused to regulate new financial instruments that facilitated speculative activity. Under the 2000 Commodity Futures Modernization Act, Congress (at the request of the Clinton administration) explicitly excluded from regulation the complex financial instruments, such as derivatives and credit default swaps, that lacked transparency and had been tools for accounting fraud. While little attention was paid to it at the time, this exclusion allowed the entire derivatives market to be unregulated. The massive shifts of funds from the regulated financial sector to the "shadow banking" sector set the stage for the financial crisis of the late 2000s. And in 2004, the SEC allowed investment banks to hold even less capital in reserve, thereby facilitating greater use of leverage in trading activities. [Private Equity at Work: When Wall Street Manages Main Street, Eileen Appelbaum]

Greek tragedy: Telecom focus of bloody PE fight

November 20, 2014

CNBC - A hedge fund and other out-of-luck bond investors have won a $565 million judgment in a long-running legal saga that accuses large private equity firms of unfairly profiting from a Greek telecom company they set up to fail with piles of debt.

Despite the favorable court ruling filed Tuesday, London-based SPQR Capital and other bondholders of the company still face legal challenges to get PE giants TPG Capital Management and Apax Partners to pay.

At issue are bonds issued by Hellas Telecommunications in 2006 when it was a major Greek mobile phone operator.

TPG and Apax bought the company, then called TIM Hellas, in 2005 for 1.36 billion euros.

Hellas took on much higher levels of debt during the reign of TPG and Apax, a large portion of which was used to pay the firms back on their initial investment. Hellas was then sold in 2007 to Italian telecom investment company Weather Investments for 3.4 billion euros.

The company collapsed in 2009 following the financial crisis, leaving some bondholders like SPQR with 100 percent losses. U.K. liquidators for Hellas later called the situation "one of the very worst abuses of the private equity industry."

The PE firms have countered by noting the company's bonds soured several years later and under new ownership and happened on the heels of the financial crisis. Plus, defenders say, bondholders like SPQR were sophisticated buyers who should have understood the risks.

SPQR, which owns about 25 percent of one of the major bond types, has been suing to get its money back in U.S. courts. SPQR is using an entity called Cortlandt Street Recovery Corp. to go after TPG, Apax and related entities in coordination with Wilmington Trust Company, a trustee for other bondholders. The crux of their claim is that the bonds were sold based on collateral that wasn't really there but instead was taken by TPG and Apax.

Jared Stamell, an attorney with Stamell & Schager, which represents SPQR, said he was happy with the judgment.

"We welcome the challenge of recovering monies on behalf of investors who were misled by the private equity firms into lending them money," Stamell said in an email.

The trick is actually getting the cash.

The judgment in New York State Supreme Court is against the actual bond issuers, Hellas Telecommunications Finance and Hellas Finance, and not the PE firms themselves. Lawyers for the bondholders have to search for assets of those Hellas units; to get money from TPG or Apax, they will have to show that the private equity outfits were in control of the units and benefited from them, according to Stamell.

"We are going to target the entities and individuals that received the loan proceeds which are Apax, TPG and their funds," Stamell said. 

He said litigation was coming but he wasn't sure when it would be filed.

If getting money from TPG and Apax doesn't work, SPQR's lawyers said they will ultimately target individuals and entities who took profit from the bonds, like TPG co-founder David Bonderman (named in a previous complaint) or TPG or Apax clients like the California Public Employees' Retirement System, which was invested in a TPG private equity fund.

Does private equity have an image problem? Erik Hirsch, CIO of Hamilton Lane, says private equity needs to be more transparent about how it goes about its business. Todd Fogarty, an Apax spokesman, said the PE firm has already been exonerated based on the recent dismissal of a separate lawsuit from SPQR and Wilmington that directly targeted TPG and Apax.

"In the Sept. 14 order in which the court granted summary judgment against the Hellas entities that issued and guaranteed the defaulted PIK (payment in kind) Notes, the court also dismissed all claims against Apax and TPG. The dismissal of those claims speaks for itself," Fogarty said. "Apax and TPG, which sold their entire interest in the Hellas group approximately three years before the default on the PIK Notes, are not responsible for the judgment against the Hellas entities."

A TPG spokesman, Owen Blicksilver, declined to comment. TPG said in March that a similar suit brought by the U.K. liquidators was "completely without merit." A spokesman for CalPERS said that TPG could speak on its behalf.

SPQR, led by CEO Bertrand des Pallières, will continue its case regardless.

"We find it remarkable that eight years after Apax and TPG took 1.5 billion euros of money that didn't belong to them, leaving a hole in the accounts of a previously healthy company, these firms continue to defend the indefensible," Stamell said.