How to Legally Defraud Investors

It is possible for the portfolio of an otherwise well-regarded entity to have, what is essentially, junk status.  This only becomes apparent when there is a collapse of the holding company, followed by massive write-downs in their asset values.  This does not happen often.  Most institutional investors are savvy enough to avoid such pitfalls, but even they may be taken in by hype, or greed.

One of the giveaway signs of such a portfolio is when all the assets, by way of share ownership in the cash-generating entities, were acquired by share swaps or asset switching.  Asset switching is a ploy to conceal the real value whilst being able to take out the cash flow from operations.  When the cash flow is off book, the registered asset value is not affected because, a switch in the asset in the form of a company with cash flow is again parked in.  However, in this later instance, the cash flow belongs to someone else who can access it without accountability to the principal, even if he is not the original owner of the cash flow.

Asset switching can be done if you have control of the subsidiary company or own it outright.  As they value the book value of the companies, they use a legal instrument by way of a deed of trust or assignment to move the title temporarily, in the view that they can then leverage it against bank lines.  It sounds complicated to the uninitiated, but it is not.

One way to discern the true financial health of the company is to look up the company board and key executives.  This is easier with listed entities.  But you then trace the relationship between the starting company and related entities, seeing the same group of related people on the boards of other companies or in key positions, all with a business relationship.  When I say related here, I do not mean familial relations, but business relations.  From there, we can track the equity lines.

Tracing these relationships to find the equity lines requires quite a bit of detective work, but it allows us to arrive at reasonable, and far more accurate values of the assets.  We need to consider the way certain companies’ annual dividends dwindle down to zero or some minuscule number.  We will find an entity with cash flow with a high burn rate where the spending is on another, sister company.  They are robbing Peter to pay Paul.

This is how money is taken out of the system into private hands.  They practise asset switching when it is convenient and asset leasing when security is needed to shore up the hollowed shell of a once profitable entity.