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alstry (35.87)

A story of "Planned" Deception????

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March 28, 2008 – Comments (4)

They say in the Home Building business, if you haven't gone bankrupt at least once, you haven't been building.

Imagine a public builder who leverages up more than ever in history.  All the while you are drawing a big salary, exercising cheap options, and dumping shares on the open market and telling everyone how great is the future.  Then you realize things have changed and sell a bunch of shares but you keep telling everyone how great things are still.....even though you KNOW different.

Then in the Spring of last year, you see the writing on the wall.  In your earings report in February you tell shareholders you are going to be profitable but at the same time you are auctioning homes below minimum bid at a loss(but of course you omit that from your projections).  In your 10K you tell shareholders you have a plan that will keep you in compliance with your loan covenants but a few weeks later you are violating them.

At that point, you know things are very difficult.  But instead of slowing down like other competitors who want to stay in business, you start opening  up a bunch of new communities.  You start spending pre bankrupcty dollars to set yourself up so when that eventful day comes, you can restructure and be ready to get the cash flowing again. 

JUST ONE THING, YOU FAIL TO TELL SHAREHOLDERS AND CREDITORS OF YOUR PLAN.

And its not just you, its you and the board that has this plan because otherwise no sane board would allow expansion and continued building of specs when all your competitors who want to protect shareholders are slowing down.

So you keep opening up new communities, building specs, losing more and more money and never reveal to shareholders what is ahead.  But you know better, because once you go bankrupt, you can wipe out a bunch of debt, get rid of dead communities, and issue yourself a whole bunch of new options to take advantage of the next go around.  Not only that, as long as you can keep the charade going, you can draw a big salary and get wonderful bonuses as a bonus.

The only problem is current shareholders and creditors get hosed as they don't get to come along for your ride.  No dividend, no collateral, no new options.

But as your behavior becomes more and more obvious, you set up a deal with the board that you will leave the company just before that eventful day comes along.  You make sure that before you leave you get a big fat nice severence package since you won't be getting newly issued options on the other side. 

When do you cut the deal? as early as you can to set up the process.  You find your replacement.  Make sure it is someone that no one would think of and one of your coconspirators of course who has your same motivations....such as an indpendent board member maybe?  Make sure he make token open market share purchases in the interim so no one could ever question his coming in to save the day after your unexpected departure.  And when he does come in, make sure he is rewarded with a fat base salary and a whole bunch of cheap options when the company emerges from bankrupcy.

In the end, the executives get rich, the board gets rich, and the shareholders and creditors get their pockets picked and no one knows the better.  THINK....some people go to jail for years for committing crimes involving much less money.  These guys....they get to sail on their yachts as the road kill they left behind litters the ground.

The above is simply a story of planned deception.  Could it ever happen in a post SarbarnesOx world.....I guess only time will tell.

4 Comments – Post Your Own

#1) On March 28, 2008 at 3:16 PM, klemenv (99.70) wrote:

Brilliant. I can't buy any other explanation, but planned conspiracy.

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#2) On March 28, 2008 at 4:49 PM, DemonDoug (75.10) wrote:

I want some of these people thrown into jail.  I wish the authorities would put more effort into fraud justice, and less into drug "war."

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#3) On March 28, 2008 at 5:23 PM, alstry (35.87) wrote:

Is S&P part of the joke on investors?

From S&P's most recent report on SPF:

"Assuming stable pricing in its major markets, we foresee the company's gross  margin at 8.8% in2008, compared to a negative 7% in 2007."

California is SPF's largest market by far........

REALITY:

Calif. home prices down 20.67%, nation’s worst  March 28th, 2008 · 18 Comments · posted by Jon Lansner/O.C. Register columnist

First American LoanPerformance says California home prices in February were falling at a 20.67% annual rate, worst in the nation again. The state’s seen the largest depreciation in home values, by this math, since May. Just behind California in this sad list, ranked by mid-month results, is Florida (-15.74%); Nevada (-15.68%); Arizona (-13.67%); http://lansner.freedomblogging.com/2008/03/28/calif-home-prices-down-2067-nations-worst/

Notice that the next three states are major markets for SPF.  How the heck can this analyst assume stable prices in March for last quarter data when he KNOWS, did I say KNOWS, that January and February prices are crashing.  This analyst seems to be providing INTENTIONALLY deceptive advice to the reader.

WTF is going on.....any analyst that is objectively covering SPF seemingly must come to the conclusion that the current asset value is no where close to the liabilities.

Just wait until CTX announces the value of its land deals.

Why is not a single analyst providing an objective perspective for their clients.

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#4) On March 28, 2008 at 10:15 PM, abitare (94.81) wrote:

Concur with Demondoug. I would start with GS CEO Paulson.

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