Greg Weston Quoted in Detailed LA Business Journal Article about FirstFed Financial

Back in June 2008 I wrote my first article about FirstFed Financial for Seeking Alpha, describing its reckless management and dishonest accounting practices.

Then I followed up in August 2008 by writing about it and two other zombie banks, which I described as the Option Arm Triplets.

Following up on FirstFed is L.A. Business Journal Reporter Richard Clough, who describes a company operating under a FDIC cease-and-desist order and trying to cut expenses to the bone. It won’t be enough. The bank is deeply insolvent, and the only reason the FDIC hasn’t taken it over already is that it is understaffed.

Look, I’m in the article too!

Still, Giraldin pointed out, just a year of unwise lending has pushed the company to the brink of failure.

Its stock, which traded at more than $69 a share in 2007, closed June 25 at 35 cents.

The stock has long been a target of short sellers, particularly after the failure of IndyMac, when many began speculating that FirstFed would be closed soon thereafter.

Greg Weston, a real estate litigator who shorted the stock for months as the price dropped, wrote an online article detailing the reasons investors should do so. Weston, founder of the Weston Firm in San Diego, recently stopped selling the stock short and closed out the position. He doesn’t think the company has a bright future, but since the stock is less than $1, most of the play is gone.

“It’s pretty much dead as an investment,” he said.

Calculated Risk also covers the article and has an active comment thread on the topic.

Two New Articles on Seeking Alpha

Both are basically attempts to calculate a value for GM debt.

My first article on the subject I am proud to say hit the #2 spot on the Seeking Alpha “most popular list” and stayed at various lower positions on the list for 3 days.

Trading the GM Bankruptcy

the second article is more or less a follow-up suggesting GM bonds were still undervalued, despite their gains following my first article, and offering more reasons why I thought the first bondholder offer would be sweetened, which is exactly what happened.

Good GM: The Largest IPO in U.S. History?

As the vagaries of fame would have it, I think by contrast about six people total read the second GM article, though six is a decent-sized audience for what was essentially Part II of a lawyer talking about junk bond valuation.

And yes, there will be a Part III.

Lexus IS300 v. BMW 335i and 535i

My current car (a 2002 Lexus IS300, known is some foreign markets as the Toyota Altezza)  is now 7 years old and nearing 50K miles, and after reading some very positive reviews of BMWs with the company’s new twin-turbo 300hp engines, I thought I’d give a couple of them a test drive.

In summary, I did not much like either of them. First, the interiors of the new beamers were not as nice as the older Lexus. The leather seemed cheap and reminded me of the vinyl seating at a diner. The steering wheels were too small and lacked the comfortable meaty feel of the IS’s large leather wheel. The dashboard layout was fine, but I didn’t like the way the turn signal worked, I kept having to manually turn it off and the ticking sound it made was overly loud. The paddle shifters on the 535 awkwardly stuck out of the steering wheel, in contrast to the well-placed buttons which are flush with the steering wheel on the IS300. The 335’s interior especially felt very “basic” for such an expensive vehicle.

The 300hp I6 engine in both vehicles was silky and powerful and makes great sounds when revved, but driving on the highway with light traffic I still found the extra power over my 215hp IS to be of little value. I grinned when I punched the engine on the freeway, looked down a few seconds later, and saw I was at 115. That was fun, but the tiny difference in pick-up speed when flooring the gas pedal is pretty insignificant compared to having to live with the inferior interior on a daily basis.

In the standard trade-off between a smooth ride and better handling, both BMWs, especially the 335, had somewhat more composed handing on turns and somewhat more jittery rides, but the difference on both counts was surprisingly small, and the larger size of the 535 made it more awkward to park in a tight space. Even the 335 and its run-flats was pretty smooth on a highway of average condition, though I imagine if I drove it on some decaying surface streets around Los Angeles I’d wish I were back in the Lexus.

Another minor hit on BMWs is the paint, which looked a bit cheap for such expensive cars. They lacked the deep lustrous appearance most new cars in this price range have. Maybe they just needed to be waxed, but in this price range I’d expect this to be done before I bought it.

One area where the BMWs really have the Lexus beat is fuel economy. Despite being heavier and having stronger engines, both have much better fuel efficiency ratings.

I left the dealership quite pleased. While my car was about $37,000 new, and is now worth perhaps $17,000, I liked it more than two very popular $45,000-$60,000 vehicles. The BMW salesman was knowledgeable, helpful, and low-pressure, which I would have appreciated if I had decided to buy. Instead I think I’ll keep the old Lexus for a few more years.

From an economic perspective, Japanese and American cars are much better values than European vehicles because even with recent declines in the Euro, that currency remains richly valued against the dollar and yen. On the issue of reliability, the IS300 was assembled in Japan of almost entirely Japanese parts. The 335 is only 70% German parts and assembled in South Africa. All that needless shipping of parts from Germany to Africa, and then shipping the completed vehicle back accross another ocean and past Equator to the US undoubtedly added to the cost of the 335 without adding to its value. I also question the impact on reliability that these very long supply chains may have on the 335.

California Unemployment Rate Round-Up

First, the headline number, we are now approaching a 55-year high in unemployment here in California. The Union Tribune’s article has a nice graph:

Looking at the data directly, the situation is pretty grim. First, between Feb 2008 and Feb 2009 the number of jobs in the state went down 495,000, even though the state’s population went up. The number of unemployed adults in California increased 824,000 during this one-year period.

Here’s what’s really bad though: more than 20% of those losses occured just in the last month.

In three counties in California unemployment is above 20%, and in 4 more it is in the 18-20% range.

San Diego and Orange counties and the inner Bay Area are doing better and holding below 10%though still worse than the national averages. LA County is worse than average at 11%, and inland Southern California counties worse still: 14.7% employment in Kern, 11.9% in San Bernadino, 12.6% in Riverside, and 24.5% in Imperial.

You can see the most recent data here at the California Development Department website.

Ponzi-Scheme Whistleblower Ordered By Corrupt Arbitration Panel to Pay a Criminal Organization $107,782

Just how corrupt and pervasively dysfunctional is private arbitration in America right now?

Via Felix Salmon, the Financial Times reports that more than five years ago a lady by the name of Leyla Basagoitia who worked at the Ponzi scheme known as Stanford Financial quit her job and alerted the SEC and the NASD (now called FINRA) her suspicions about the criminal fraud going on.
Rather than having her day in court, instead Ms. Basagoitia was forced into a kangaroo arbitration and forced by the arbitrators to pay the criminal organization she tried to blow the  whistle on $107,782.

So in part because of NASD’s arbitrators, the fraud was allowed to continue for years longer until it finally collapsed on its own weight last month.

As the article notes:

Ms Basagoitia told an arbitration panel at the National Association of Securities Dealers in October 2003 that she suspected Stanford Group Company, one of Sir Allen’s key businesses, was “engaged in a Ponzi scheme to defraud its clients”, according to case documents. In 2007, the NASD became the Financial Industry Regulatory Authority.
In a nine-point critique, Ms Basagoitia pointed to many concerns cited last week by the SEC in its charges against Sir Allen’s businesses, including allegations about the lack of a credible auditor, mis-selling of products and the promise of consistently high returns that did not “correspond to the reality of the markets”.
Ms. Basagoitia’s allegations were denied by Stanford Group Company and dismissed by the dispute resolution panel. She was ordered to pay Stanford $107,782 in damages, in repayment of a loan advanced to her while an employee of the company.

Great work again by the Financial Times, in particular to reporters Robert Cookson and Michael Peel in London and Joanna Chung in New York.
PS: I had my moment in the famous pink pages of the Financial Times last year. Have a look at the end of this article.

Unemployment in the Inland Empire set to reach Great Depression levels

David Pierson of the LA Times reports that unemployment is soaring the the Inland Empire (San Bernadino, Riverside and eastern LA counties), hitting 9.5% as of October. Given that we are now well into November, it is probably above 10% now. And these are the official statistics that economists agree understate the real number of unemployed by not counting those who are working part time while looking for full time jobs, and “discouraged workers” who want to work but have given up actively looking for a job.

Meanwhile next year tax shortfalls will mean more local government layoffs. Construction employment will continue to decline as financing dries up and the last buildings that were under construction when the economy turned are completed. Retail employment will also continue to decline as consumers are either pinched or under fear they soon will be.

FASB posts The Weston Firm’s comment letter on Proposed FSP FAS 140-e and FIN 46(R)-e

Big banks and financial companies have long gotten away with not disclosing clear and accurate valuations of many types of financial assets. When I heard that the Financial Accounting Standards Board was seeking comments on proposed stronger financial disclosure rules over one type of financial asset, “Variable Interest Entities,” I reviewed the changes and then wrote a letter in support.

As it turns out, my letter was the first of 31 to be submitted. The second letter was submitted by a leading independent accountant, Jack Ciesielski, who also offered his unqualified support for the FASB proposal.

He maintains a blog on accounting issues here: http://www.accountingobserver.com/blog/

After our two letters in support came a flood of opposition letters from such models of probity, foresight, and clear and forthright financial reporting as AIG, GMAC, Freddie Mac, Fannie Mae, MBIA, UBS, and Mortgage Bankers Association.

Links to all of the letters submitted to the FASB are here.

Big New Article on Seeking Alpha

In retrospect perhaps I should have broken this long article up into several new ones. In it I comment on the prospects for solar stocks, gold, Goldman Sachs, Lorillard, Ambic, and GM senior debt. In particular, I comment on what the election of Barack Obama and a larger Democratic majority in Congress means for several investments.

One theme in this article touches on that I hope to explore further is that I believe equity markets are systematically underestimating inflation volatility.

Fighting Back Against Illegal Arbitration Clauses in Condo Purchase Contracts

Quick Summary: In this post, Greg shows how arbitration provisions in condo purchase agreements violate California law and cannot be enforced.

In my cases representing real estate investors who want their new construction condo and house deposits back, I often encounter arbitration clauses. I have yet to see one that I think would hold up in court under California law.

One such reason is that the arbitration clauses encompasses not only the buyer’s right to a jury trial, but the buyer’s right to a specific form of statutory relief, such as attorneys’ fees or punitive damages. However, in pre-printed form contracts, both state and federal courts usually rule that arbitration agreements which prevent the plaintiffs from seeking a certain form of statutory relief are unconscionable, therefore unenforceable.

In a 1985 case over an arbitration agreement between a car manufacturer and a car dealership, the U.S. Supreme Court ruled “[b]y agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 628 (1985). This means that if you are entitled to attorneys’ fees under a specific statute in a jury trial, you are equally entitled to attorneys’ fees under the same statute in an alternative forum.

Consequently, the California Supreme Court ruled that an adhesive arbitration agreement abridging an employee’s right to acceptable discovery, judicial review, cost limitations, and punitive damages in a wrongful termination action against her employer is “substantively unconscionable” and thus unenforceable. In the key California Supreme Court case of Armendariz v. Found. Health Psychcare Servs., ruled that California common law “disallows forms of arbitration that in fact compel claimants to forfeit certain substantive statutory rights.” Armendariz v. Found. Health Psychcare Servs., 24 Cal. 4th 83, 99-100 (Cal. 2000). The same rule was cited in three  recent federal cases: Gelow v. Cent. Pac. Mortg. Corp. Circuit City Stores v. Adams. See 279 F.3d 889, 893 (9th Cir. Cal. 2002); Ingle v. Circuit City Stores, Inc., 328 F.3d 1165, 1179 (9th Cir. Cal. 2003); Gelow v. Cent. Pac. Mortg. Corp., 560 F. Supp. 2d 972 (E.D. Cal. 2008).

Besides these common law rulings against arbitration, California’s statutory law also limits the use of arbitration. First, California Civil Code § 1668 states that “All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.” In other words, a contract cannot give a developer carte blanche to break the law without facing the consequences.

Second, California Civil Code § 3513 says that “Anyone may waive the advantage of a law intended solely for his benefit. But a law established for a public reason cannot be contravened by a private agreement.” Attorneys’ fees, punitive damages, and other statutory remedies often have a public purpose, such as creating a disincentive for committing future wrongdoing. Consequently, the Ninth Circuit Court refused to enforce an arbitration agreement between a petroleum franchiser and a petroleum franchisee that failed to allow for attorneys’ fees and punitive damages, which were available under the Petroleum Marketing Practices Act. In the 1995 case of Graham Oil v. Arco Products Co., the court concluded that these remedies were “important to the effectuation of the PMPA’s policies.” Graham Oil v. ARCO Products Co. (9th Cir. 1995) 43 F.3d 1244.

Finally, the Armendariz court ruled that “[a]rbitration agreements that encompass unwaivable statutory rights must be subject to particular scrutiny.” Armendariz 24 Cal. 4th. This means that if your arbitration agreement limits your right to a specific form of statutory relief, it might not stand up to scrutiny in a court of law.

It is well known that arbitration, while a good alternative to litigation in many contexts, it drastically unfair when the participants are a regular person on one hand, and a giant corporation on the other. If you have a condo deposit and want a refund because you are unable or unwilling to close, do NOT agree to take the case to arbitration. With the assistance of an attorney experienced in condo contract litigation, take the case to court. At that point you can oppose the arbitration clause before a judge, who will hopefully rule in your favor on this issue.

Greg Weston is a graduate of Harvard Law School and experienced business attorney licensed in California and Florida. Mr. Weston’s San Diego-based practice focuses on representing individuals and small businesses against large corporations, including cases involving condominium purchase agreements and other real estate investments. He can be reached at (619) 255-7098 or greg@thewestonfirm.com. Comments about the blog via e-mail are welcomed.

California Foreclosures Soar To New Records In August

An article focusing on Riverside and San Bernardino’s problems is here:

The highlights are grim:

With 11,485 foreclosure-related filings last month, Riverside County ranked fourth nationally in foreclosure activity, with one filing for every 64 households. San Bernardino County ranked sixth with 9,651 filings, or one for every 69 households.

In Riverside County, total foreclosure-related filings were up 58 percent from a year ago and 39 percent from July, while in San Bernardino County, total filings increased 98 percent from August 2007 and 34 percent from the month before.

Most of the growth was in bank repossessions. There were 4,165 in Riverside County, up 248 percent from a year earlier, and 3,172 in San Bernardino County, up 348 percent.

A press release with national figures on the real estate decline is available here.

The figures are so bad it is hard to wrap your mind around them. In several California counties, 1 in 50 or 1 in 60 households were hit with foreclosure notices in just a single month.