Flaherty Financial News Newsletter #22

After two foul balls, Asia Special Situation Acquisition got on track by starting off January 2010 in the reinsurance and hedge fund businesses and assumed the new name GEROVA Financial Group, Ltd. It made some daring acquisitions, and describes itself as "an international reinsurance company, with operating insurance subsidiaries in Bermuda, Barbados and Ireland. GEROVA believes it has opportunities to deploy shareholder capital to acquire high quality assets at less than market value and opportunities to gather additional assets by providing reinsurance capacity to primary insurers that are under writing capacity pressure."
GEROVA acquired an estimated $541 million in net assets managed by hedge fund managers of Stillwater Capital Partners, Inc. but subject to post closing independent audit and appraisal. It also added millions of assets managed by Weston Capital Asset Management LLC. (In addition, management of over $1 billion in other assets under Weston was acquired by NYC-based Fund.com.) The GEROVA press release was turned out by ex investigative reporter Dick Stern, who handles Galanis' Fund.com. pr work.
In April shares fell as NYSE Amex threatened to delist GEROVA shares before relenting after management made some financial moves. On June 9 GEROVA announced receiving listing authorization from NYSE Amex to continue listing ordinary GFC shares and new warrants and units under GFC.WS and GFC.U respectively. On June 10th the PR Newswire exciting headline "GEROVA Receives Regulatory Approval for Bermuda Reinsurance License" sent GFC stock soaring 313%. Just about then GRC stock was being added to the Russell 3000 Index and that automatic forced buying of about 2 million by the Index provided liquidity for unknown parties to sell as the stock crashed 62% in six days on enormous volume. Who was behind all this? Did a secret short seller make a killing?
Being a foreign public company traded on NYSE Amex means forms can be filed later than domestic ones. But before June 30th someone had to sign GEROVA'S annual report for 2009 and its Sarbanes Oxley Act statement.
Valuation questions at Stillwater could make a timid soul reluctant to use his John Hancock. For starters, the deadline for the assets to be independently audited was last March 31, but they still aren't audited.
The Stillwater Funds were a collection of Delaware Limited Partnerships and Cayman Islands exempt companies, all of which were pooled investment vehicles. The portfolios consisted of mostly illiquid short and medium term loans and other asset backed obligations for various types of borrowers, consisting of lines of credit to attorneys to pursue tort suits, etc, real estate investments and life insurance settlement and premium finance loans. The preceding includes participation in loans and loan portfolios of other lenders, undervalued real estate, distressed real estate and real estate sold at foreclosure sales and a portfolio of hedge funds with diversified investment strategies.
Stillwater's assets contain some illiquid dicey-risky asset back real estate mortgages where the default rates have been high, big life insurance policies on people many of whom are behind on their premiums and policies on some tort suits whose pursuit needs more financing. Stillwater believes if held to maturity most of its troubled assets can be harvested by catch up  payments, foreclosures or other means. Unfortunately, lack of liquidity has prevented GEROVA from making steps necessary to preserve asset values.
Complicating its lack of liquidity is $30 million owed Stillwater investors who want to redeem but have their Stillwater fund accounts frozen. Paying the redemptions now would mean selling assets at a loss .
If we read the 171 page annual report correctly, the redemptions must be made before funds can be redeployed to help maintain the Stillwater assets. Already, the value of the life insurance policies is down 50% because premiums haven't been kept up on some policies. Likewise, not funding some tort suits is hurting. More real estate being foreclosed could be lost if Stillwater  doesn't ante up. Making the liquidity situation even muddier is $24 million in unpaid management fees owed to Stillwater managers, which is supposed to come out of operating cash flow at management's discretion. Then there are millions in  unpaid underwriting fees. These are huge obstacles to increasing working capital and helping to preserve Stillwater assets considering that on December 31, 2009 GEROVA cash was only $973,000 and working capital only $198,000.
Yahoo.Finance's GEROVA message board is filled with insightful comments from angry GEROVA shareholders. Here is their take on what has been happening to them and what is on their minds. Headlines in bold, inside comments in regular type.
June 30 is a Very Big Day for GFC. Here is what should happen: 1. the appraisal of assets must be completed. Not only would shareholders like to have some inkling of what the assets are worth, but it is essential for another event. If the assets are valued in a range, (which they will be since they are unquoted) then the company will use the high end of the range. Nice.
2. Replace $120 million in statutory capital with $120 million of Stillwater assets. Clearly they have to know what the assets are worth prior to pledging them. In this case, the high end of the value range doesn't apply: what applies is net realizable value. 3. The need to repay or renegotiate $55 million with Commercebank.
If either 2 or 3 doesn't happen, Northstar Group Holdings Ltd. (an insurance   unit 38% owned by GEROVA after its Stillwater acquisition which on December 31, 2009 had assets of $800 million and capital of $120 million) will be in a state of default. The plot thickens.
SEC worthless; this should be halted and investigated. Morons.
Even I'm Shocked!
Down 30% on 60 x Average Volume. (2 million shares to short provided by forced Russell 3000 Index buying)
Took some losses I thought after all the stock scams from the 90s companies couldn't get away with blatant fraud anymore. But the SEC does nothing and I blame myself for being ignorant. Congratulations short sellers for seeing what I didn't and a big Congrats for GEROVA for fleecing investors. Enjoy your big homes and yachts in Bermuda!! When money runs low... start a new shell company and start all over again. I would love to become a mentor and figure out this racket!!
Censored This one is too extreme to report. -ed.

Common is worth zero. Total scam!
No corporate website!! Frankly said, it is embarrassing that a company being added to the Russell 3000 doesn't have a website, no info about revenues, debt and so on... no transparency, this is not good in the financial world.
(In fairness GFC filed its 2009 annual report after all of the above comments, although that report is still not up on its hard to reach website.-ed.

Fund.com Shares Collapse 97%

Meanwhile there are also strange things happening back in the Big Apple at Fund.com Inc. (FNDM.OB-0.07) and its 60% majority controlled actively managed ETF IPO initiator AdvisorShares Investments, LLC.
  Here is what sounds like very good news. After many months of effort, on March 29, Fund.com acquired the hedge fund operation of Weston Capital Management LLC, which claims management of over $1 billion in alternative assets. That is a triumph for such a tiny start up! Now The Invisible Man's creation can earn fees on over $1 billion in assets. (Weston also has assets in The Invisible Man's GEROVA. See above.)
There is more good news. After three months of delay, Mars Hill Global Relative Value ETF (NYSE arca: GRV-25) the first ever actively managed long/short ETF has made the cut past the SEC regulators and commenced trading on July 9. In the developmental pipeline is Active Bear ETF (HDGE) the first ever totally short actively managed ETF. Fund.com is turning out unique actively managed ETFs like hotdogs. Yet instead of soaring shares of Fund.com have fallen 97% to a new all time low.
    In late June Fund.com Chief Operating Officer and Executive Vice President Phillip Gentile resigned, alleging, among other things, the cash-strapped company owned him salary and had not reimbursed him for expenses.
In spite of a promotional email giving many positives why the stock may be "extremely undervalued", Fund.com stock dropped like a rock. Recently as low as $0.05, shares have collapsed 97% from the 12 month high of $2.75 and 98% from the April 2008 high of $4.49.
Failing to meet predictions appears to have created a lack of credibility. In March management bullishly announced Fund.com was on schedule to bring out three new ETF funds in April to compliment its already existing ETF of ETF Dent Tactical ETF (NYSE: DENT-18.70), which has an exorbitant expense ratio of 1.56%, one of the highest of any ETF to accompany its initial poor performance. July's addition of their second trading GRV also has a sky high expense ratio. However, the launch of the greatly hyped WCM/BNY Mellon Focused Growth ADR ETF (NYSE:ASDR) is months overdue.
In the May 6 Flash Crash where the Dow lost almost 1000 points in 20 minutes prices went crazy. ETFs made up 70% of the trades which regulators had to order to be cancelled, raising serious issues about ETF liquidity in general during a crisis and specifically whether derivatives could trade well in a crisis. The SEC appears to be taking more time with these actively managed ETFs which the SEC grants exemptive relief from some of the provisions of the Exchange Act of l940. Clearly in a crisis ETFs have more risk and are not as easily redeemed as conventional mutual funds. More unknown problems are destined to pop up for this new ETF vehicle in the next crash, especially if most of them all want to sell in the same second.
Ominously Fund.com states that it currently lacks the capital or resources to pay what will be due its hyper active subsidiary AdvisorShares if new assets under management milestones are achieved. Also the terms of the acquisition of the Weston Capital hedge fund operation contained highly complex provisions if Fund.com defaulted or failed to pay the sellers on time. Investors should be aware of these possible penalties because Fund.com has had an uninsured CD frozen in an offshore Caribbean bank in a complex transaction related to The Invisible Man and so has failed to meet some past obligations.

Management sellers of the Weston hedge fund operation made default very onerous by getting a $5 million SENIOR Secured Promissory note. if they do not get what they were promised on time. A huge chunk (50.9%) of their management ownership at the time of the acquisition is their collateral. If that was ever taken back, other remaining ordinary Fund.com shareholders would be in a pickle.
How can an ordinary investor make an intelligent informed decision about the prospects for Fund.com shares since their value depends upon events we cannot know today, especially the activities of The Invisible Man whose identify is not in the SEC filings? Investors can't read what isn't there. It is just that simple!
Understanding figures also is puzzle. In response to an SEC staff inquiry all past figures had been ruled unreliable, leaving investors to fly blind. Around mid April an E for being late in filing was temporarily added to Fund.com's regular stock symbol until it filed new financials. It did, revealing that in the quarter ending December 31 on revenues of $59,000 Fund.com lost $3.4 million. After going dead a few days, its message board on Yahoo.Finance is up again but with no recent entries. Daily Average share trading has declined sharply since last year as a flood has become a trickle on many days.
Initially hyped as "The New Morningstar", Fund.com has announced a strategic partnership to create "a new generation search engine" and a system for matching investor interests with mutual funds and ETFs, including those sponsored by now related Weston. Ironically, in the most supposedly transparent part of the investment world, funds for the public, The Invisible Man still moves unnoticed and is associated with a unit granted exemption by the SEC from some regulatory provisions.
No where so far has influence-or even the association-of online credit card processing pornography entrepreneur Jason Galanis been revealed. Don't prospective future fund and ETF investors deserve to be at least made aware of Jason's involvement? Ditto for any of his relationships with those creating the new rating scoreboard for funds and ETFs and also his conflicting involvement with those initiating actively managed ETFs which will be compared with competing products? Ditto for his creative innovative Web products for online "everyday investor" education and research?
Again we ask whether adequate disclosure is being given to protect everyday investors. Everywhere institutional investors are getting the edge on the average individual investor as the stock market becomes more and more like a gambling casino. One big reason trading has become so volatile is regulators allowed changes to speed up institutional trading and especially flash trading where traders become insiders and see orders seconds before they are executed. That blink of an eye is all some flash traders need to front run orders. And regulators seem unaware that they have created a wild market which is frightening the ordinary investor away!
Hundreds of pages have been churned out by lawyers for investors and regulators, including many boiler plate risks in numerous prospectus, etc. What is left out is the cause for alarm. What protection are prospectuses and annual reports if the biggest risk, the presence and association of The Invisible Man with all his consent decree baggage of SEC accounting fraud and Sarbanes Oxley signature charges is left out? No wonder small investors are fleeing stocks and funds.