Outside The Box

Frolics and Detours

           I was a founder of Security Income Trust, LP which was a partnership with Kidder Peabody & Co. Operating under the names Security One and Habitec Security, Security Income Trust acquired over 50 alarm-monitoring companies and became the largest independently owned security alarm company in Ohio and Michigan. It gobbled up a lot of minnows and became an attractive meal for an even bigger fish.

           I was a founder of Stone Pine Capital, a merchant banking firm owned by myself, Paul Bagley and Tom Rogers. Among other things, Stone Pine acquired the New York Stock Exchange member firm of Laidlaw & Co., the second oldest member of the Exchange after Alex Brown. We bought it from a German Baron and it had a large European client base. We sold it to a Taiwanese company called Pacific USA. I was Vice Chairman, a position that didn’t require me to go through the NASD testing process. The Taiwanese hired a hot rock superstar who made Laidlaw’s stock a high flyer in the dot.com days by touting it as the coming of Ameritrade to Europe. He got more interested in his own stock price than building a solid business and ruined it when the bubble burst.

           Stone Pine Capital also created an investment fund in cooperation with Hamilton Lane Advisors, which was marketed to European and Middle Eastern institutions and was listed on the Irish Stock Exchange. These funds offered offshore investors the opportunity to invest pari pasu with Hamilton Lane clients like the California Public Employees’ Retirement System (CalPERS) and the New York State Common Retirement Fund. It was a great success, and lead to a whole series of funds.

           The Irish Stock Exchange was a trip. It consisted of a room about the size of one of Kutak’s square conference rooms, with a big square table in the middle. There were eight big green chairs. On what seemed to be an ancient black blackboard were written the names of about twenty stocks with their prices in dusty white chalk. That was it. No computers. No bells. No room for excitement.

           Why list? Because certain institutional investors can invest in any security listed on any European exchange. We were led to believe by our Irish lawyers the Irish listing would be a cakewalk. Instead the lawyers ate our cake, and our lunch, too. They got the job done, no matter how long it took or how much it cost.

           Stone Pine entered into an agreement with a New York law firm which represented the provincial government of Beijing. We were to put together an investment fund to invest in the Beijing High Technology Zone. The “zone” included all of China. “High technology” consisted of any business that China needed.

           I and others traveled all over China, interviewing computer manufacturers, animal feed companies, plastics companies and other businesses of all types and descriptions. We also interviewed Americans doing business there, like Arthur Andersen (RIP), Merrill Lynch and Bankers Trust. We learned a number of things.

           “Chinese accounting” is an oxymoron. It is a Chinese fire drill. Chinese companies pay each other with accounts receivable from other companies, and the receivables age, and age, and age. The “adjustments” necessary to transform Chinese accounting to anything resembling US GAAP are labyrinthine and arbitrary.

           There is no concept of accountability to shareholders, because the shareholder has been the government. The companies are run for the benefit of management and anything management can skim is okay. (Sound familiar?)

           There is no justice system for foreigners to rely upon, and they can be a little bit tough on their own people. While we were there the US complained about video piracy and threatened to yank China’s most favored nation’s status. China rounded up 8 “video pirates” and tried, convicted and executed them before the week was out to demonstrate its “good faith.”