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LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form.
Well, I for one am looking forward to the remainder of this coming week as 14 of the 30 companies in the DJIA put their earnings reports on the table for all to see. Isn't human nature (or at the very least the wonderful world of analysts) an amazing thing when we can be excited about a two-day "rally" at the end of last week. With a flood of economic data to be released this week, a US election around the corner, a pending war just across the pond and golf season winding down north of the 42nd parallel, let's stop fretting about yesterday, wringing our hands about what may or may not happen tomorrow and set our minds on meeting our objectives today. Much (long-term)
success to you, DPG.
14 Years of Exceptional Service Contact Nikki Barnett (416) 367 - 1055
In This Months Issue: (Click on the Article Title To Go To The Full Story.)
Quote Of The Month: Investment Hindsight:
Start-up lore is full of stories about companies where hyping products and resources comes perilously close to–or even becomes–lying. There’s the founder who asks friends and family to masquerade as customers the day the venture capitalists come for a visit. There’s the CEO who underestimates–drastically–the time it will take to develop the product for a different machine or operating system. Sometimes it’s hard to tell the difference between reasonable hype and falsehood. We asked Umang Gupta how he makes this distinction: When you sell sushi, you call it "sushi"–that’s marketing. You could call it raw dead fish. Is that the truth? Or is sushi the truth? Both of them are truths; one is just describing it in such a way that when you sell it–compared to your competition–you are presenting it in the best way. It is raw dead fish, but at the end of the day, nobody will eat raw dead fish although there are lots of people who love raw dead fish that happens to be called "sushi." So that’s not stretching the truth. It's packaging or labeling that makes marketing work in a capitalist society. Stretching the truth is when you say you have $3 million in the bank when you really have $3000 in the bank. That’s beyond stretching the truth; that’s lying. If I can’t trust somebody to tell me the truth, I find it impossible to work effectively with them. I figure the opposite is true, too. If I can lie to somebody about one thing, I could be lying to them about some other thing. How could they trust me? I don’t want you to think I’m so moralistic I ought to be in the priesthood. But I am pointing out that when you do business with people, it needs to be based on building a long-term relationship rather than on a transaction basis (the latter meaning that they buy something and you never see them again.) You cannot compromise long-term relationships for short-term benefit. It always comes back to haunt you. Relationships are the essence of a great brand. If you don’t build relationships based on trust, you don’t have a great brand. A lot of the essence of great marketing is ethics, and ethics doesn’t necessarily mean being moralistic and high-minded and holier-than-thou. It means being consistent and trustworthy in what you say. Here’s an example of a common, everyday ethics dilemma for a business: How does a salesman answer the question, "How many customers do you have?" Well, what is a customer? Is a customer someone who paid full price or someone you gave the product to at 90 percent off to try it out? What if you sold the product to them but they’re really not using it anymore, but they still bought it? Are they customers? What if they actually haven’t paid for it yet but they’re using it every day? Is choosing the right definition of customer an ethical issue? Yes. But is there only one ethically correct definition? No. My strategy for solving this type of dilemma is: I pick a rule, not just for that moment but one I intend to use consistently into the future. The rule may be subject to interpretation in different ways, but I choose one based on my best judgment of what is reasonable. Then I say, "Let’s agree this is the rule from now on, so the next time we won’t have to have the discussion of what’s the ethically right answer, regardless of whether the answer is helpful to us or not. We’re being ethical by being consistent." Ethics isn’t just doing things that are legally required or morally right; ethics is also being consistent to a set of principles. To the extent that you’re consistently following a certain business rule that is accepted by the other party–and not just to suit your purposes at a certain time– that’s being ethical. Umang Gupta is chair and CEO of Keynote Systems, which tracks and analyzes the performance of Web sites. Gupta was the founder of Centura Software Corp. (formerly Gupta Corp.), a leading wireless software tools and database company. He has also been an active investor and adviser to a number of Silicon Valley start-ups. From 1981 to 1984, he was vice president and general manager of the Microcomputer Products Division of Oracle Corp. The interview was published in the Spring 2001 edition of "Ethics Connection" published by The Markkula Center for Applied Ethics at Santa Clara University. The Markkula Center is a nationally recognized resource for people and organizations wanting to study and apply an ethical approach to the crucial issues facing our world. The Center supports research, assists faculty in integrating ethics into their courses, and helps businesses, schools, hospitals, and other organizations put ethics to work. The original article can be viewed at http://www.scu.edu/ethics/publications/iie/v12n1/customer.html .
Some interviewers believe there is no such thing as "off the record." What can you do to keep the record straight? "When a reporter asks questions," as David Brinkley once said, "he is not working for the person being questioned, whether businessman, politician or bureaucrat. He is working for the readers and for the listeners." When professionals have to meet the press, whether to answer questions in some crisis situation or to explain a new development or public works project, it is too easy for them to lose sight of this elementary fact of life. News writers and editors take their role very seriously as the "eyes and ears of the public." They are skilled at digging and probing, and are geared to ask brash, and sometimes embarrassing, questions. Today, many businesses and professionals face a skeptical public, an
increasingly real and intrusive global economy and persistent environmental and
infrastructure crisis -- not to mention the ever-present threat of structural
failures, toxic spills and other technology-related disasters. An executive or
professional can suddenly be thrust before batteries of cameras and microphones,
with his or her career and a company's future on the firing line. On the other hand, a press or broadcast interview can be an ideal
opportunity to explain your company's strengths and contributions. For all these
reasons, knowing how to work with the press is more important than ever. Therefore, be prepared! Your interviewer may be a
good listener who is thoughtful and well-briefed on your industry and
profession. Or he or she may be waiting to pounce on any sensational tidbit.
Either way, thorough preparation is essential: unless you have done it many
times before, it is almost always a mistake to attempt to "play it by
ear." Prepare by anticipating the questions that probably will be asked and
gathering the facts and details to deliver effective answers. Set up a simulated
interview. Brainstorm with your colleagues or your PR counsel to develop
questions and answers. Make the simulation tough and thorough, with rude and
follow-up questions if appropriate. The more strenuous the preparation, the more
you will be at ease during the real interview. During the interview itself, take your time answering questions; if you
need additional facts to support your position, send someone to get them, or
promise to provide them within a reasonable period, and follow through on the
promise. Have a tape machine going to record the conversation (or at least your
half of it, in the case of a telephone interview); this can be a big help later
if accuracy is an issue. Here are 10 more guidelines our associates and clients have found
helpful over the years: 1. Keep it simple. Be ready to communicate your entire study, statement or corporate
position in one clear, preferably vivid, "distortion-proof" utterance.
If necessary, repeat it, with variations, throughout the interview. Broadcast
interviews, especially, allow little time to make your point, especially during
a crisis. In the age of the "sound bite," you may get only a few
seconds to explain a complex situation and how your company plans to respond to
it. 2. Lead off with your most important fact.
This is the way news stories are constructed. Begin with your basic statement or
conclusion, then provide the amplification and background. This reverses the
usual professional/scholarly procedure of building up to your findings. But the
first things you say are likely to be the ones the reporter will remember and
get down on paper. 3. Go beyond "yes" or "no."
When asked a direct question, give a direct answer, but don't stop there; use
the yes-or-no question as a bridge to get to the point you wish to make. One of our clients, having completed a multimillion-dollar waste treatment system upgrade for a large (and controversial) chemical facility, was asked, "Is XYZ Company still dumping poisonous sludge into the river?" The answer, which had been considered long before the question was asked, was, "XYZ's management is committed to protecting the environment and has spent more than $120 million for new and improved equipment. The water that leaves the plant is healthy even for extremely fragile aquatic species, and XYZ has eliminated potential odor problems as well, thus meeting and going beyond 100-percent compliance with federal and state standards." 4. Put it in writing. Provide a brief printed synopsis of the points you wish to make, and is
necessary a longer "backgrounder" with additional detail. Members of
the press are busy; most will appreciate having a written summary than can serve
as a starting point. Needless to say, the summary should not be obviously
self-serving, but clear, factual and geared toward answering the public's
questions. 5. Speak (or write) from the public's viewpoint as well as your own.
Avoid technical jargon, but use the language you would use with an intelligent
friend who does not share your technical training. This may be harder than you
think. A professional who has spent years managing and operating projects must
make a deliberate effort to step back and see his firm or project as it appears
to the layman. A good way to achieve the necessary objectivity is to consider
the issue or project in terms of its ultimate use and benefits rather than in
terms of construction costs, technical procedures or the requirements for
meeting regulatory criteria. 6. Don't say anything you wouldn't want repeated.
Once you feel at ease in the interview situation you may be invited to offer
speculative comment or generalized insights or observations about your
profession and industry. Usually, this is no problem; the vast majority of
writers, in our experience, will respect your confidence. Some, however, believe
that there is no such thing as "off the record." Until you know the
person well, it is wiser to stick to your main theme. 7. Maintain a positive attitude.
In the interview situation you may face interrogation by individuals skilled at
asking leading or provocative questions. The best way to handle this is to be
aware of your own attitude and how it comes across to others. Be positive and
confident -- neither "superior" nor falsely modest. The image that
should come across is that of a competent professional, who knows the facts and
respects the public's right to honest, meaningful information. 8. Don't let anyone put words in your mouth.
If a question contains offensive or injudicious words or phrases, do not
repeat them even in order to deny them. It isn't uncommon for a reporter
to deliberately phrase a question provocatively: "Wasn't your emergency
training program really slipshod?" If you answer, "No, our program was
not at all slipshod," other reporters are likely to pick up what has now
become "your" phrase. This increases the chances of your being quoted
in tomorrow's papers under the headline OFFICIAL DENIES
"SLIPSHOD" CHARGE. Rather than a denial, use the question to give a factual, positive statement of the dollars and man-hours the company has put into emergency preparedness. At the same time, you avoid associating yourself with the unflattering phrase. 9. Don't argue with the interviewer.
Especially in a high-pressure or crisis situation, a writer or reporter may seek
to enhance the news value of the story by provoking you to indignation or anger.
Stay cool. In an argument with a writer, you can't win, because he or she is the
one who shapes the story. A power struggle or hostility during the interview is
not likely to improve the story from your point of view, and may turn it into a
disaster. 10. Finally, tell the truth. Even if it hurts. There is hardly any problem so awkward or damaging
that you can't make it worse with an attempted cover-up. Many an interviewee has
avoided momentary embarrassment by telling a half-truth, which is, of course, a
half-lie. The media today are waiting to jump on anyone caught concealing an
unpleasant fact. If the subject is one that has caught their readers' or
viewers' attention, the evasion will not be forgotten or forgiven. On the other hand, an honest admission of error or misjudgment, an
explanation of the circumstances and an expression of the company's concern --
and its intention to do right by those affected -- will encourage most
publications to take a fair and balanced viewpoint, and give your side a chance.
Just as important, by being open and candid, you keep the door open for future, follow-up work with that publication or broadcaster. That, in the long run, is how you will get your fair hearing in the court of public opinion. © Salwen Business Communications all rights reserved. Salwen Business Communications (SBC) was founded in 1989 to provide the finest communications services for a
wide range of technical and professional organizations in such fields as
engineering, transportation, environmental services, planning, technology
development, manufacturing, architecture, and construction.
State securities regulators released a list of the “Top 10” scams,
risky investments or sales practice abuses they’re fighting. New to the third
annual list are unscrupulous brokers, conflicts of interest in analyst research,
charitable gift annuities, and oil and natural gas scams. “Record-low interest rates and a bear market on Wall Street have
created a bull market in fraud on Main Street,” said Joseph Borg, president of
the North American Securities Administrators Association (NASAA) and director of
the Alabama Securities Commission. “Con artists know investors are concerned
about the volatile stock market and low yields on bonds and bank deposits, so
they pitch their scams as safe alternatives and promise high returns – an
impossible combination.” The 2002 list was again topped by independent insurance agents selling
risky or fraudulent securities. Borg said that while most independent insurance
agents are honest professionals, too many are letting high commissions lure them
into selling high risk or fraudulent investments. The federal war on terror and large budget deficits at the state level
are diverting or pinching resources to fight investment fraud, Borg warned. “Putting people in jail gives investors the biggest bang for their
regulatory buck,” said Borg. “So legislators at all levels need to ensure
that regulators and prosecutors have sufficient resources to successfully bring
securities fraud cases.” Here are the “Top 10” investment scams, ranked roughly in order of
prevalence or seriousness: · In an alleged scam sold almost entirely by independent insurance
agents, investors in at least 14 states lost close to $30 million. According to
Ohio securities regulators, money raised from the sale of fictitious limited
partnerships was used to make interest payments to another group of promissory
note investors. Both groups were promised double-digit returns. In April a court
issued a preliminary injunction and appointed a receiver in connection with the
allegations. · Earlier this month, an Arizona insurance agent was sentenced to 10
years in prison for selling $1.8 million in worthless stock and bogus promissory
notes to investors. Another Arizona insurance agent was sentenced in May to five
years in prison for scamming 32 elderly investors out of nearly $2 million by
first soliciting them to purchase ‘living trusts’ and then switching them
into annuities and finally into bogus promissory notes. A third Arizona
insurance agent, working with his two sons, scammed $16.2 million by selling
high risk brokered CDs, viatical contracts, real estate deals and equipment
leases. They were ordered to repay all $16.2 million and fined another $133,000. To verify that a person is licensed or registered to sell securities,
call your state securities regulator. If the person is not registered, don’t
invest. 2.
Unscrupulous stockbrokers.
The declining stock market has caused some brokers to cut corners or resort to
outright fraud, say state securities regulators. At the same time, some
investors have grown more cautious and are scrutinizing their brokerage
statements for unexplained fees, unauthorized trades or other irregularities. In
North Dakota, regulators investigated a complaint from an investor who received
conflicting account statements. They discovered that two brokers working for
H.D. Vest Investment Securities Inc. issued phony account statements to cover up
losses from hundreds of unauthorized trades. The brokers had also made
unsuitable recommendations such as risky options contracts. Under a settlement
with state securities regulators, H.D. Vest agreed to repay clients’
out-of-pocket losses plus 6 percent, totaling over $3.2 million. In New York, the attorney general’s office took action against seven
brokers and two firms for bilking hundreds of elderly investors out of more than
$12.5 million through a pay telephone scam. The brokers pressured investors into
liquidating their CDs, annuities and IRAs, sometimes at significant penalty, and
promised them “risk-free” 14 percent returns. So far one firm has agreed to
pay $5.9 million in restitution. 3.
Analyst research conflicts.
In May, the New York Attorney General’s office concluded a 10-month
investigation into whether Merrill Lynch had issued misleading research reports
by entering into a settlement agreement with the firm. Under the agreement,
Merrill Lynch agreed to pay a $100 million fine and make significant changes to
way it does business. NASAA is assisting a multi-state task force investigating
conflict of interest issues at Wall Street firms. The primary focus of the
ongoing investigation is to determine whether analysts issued glowing research
reports and made “buy” recommendations in order to win investment-banking
business. State investigators are now reviewing materials provided by a dozen
firms for possible securities law violations. In June NASAA learned of an attempt by Morgan Stanley Dean Witter to
amend an early version of the Sarbanes-Oxley Act with language that would have
ended the states’ probe into whether Wall Street analysts intentionally misled
investors. NASAA held a press conference and met with lawmakers; the draft
amendment was ultimately not included in the bill. 4.
Promissory notes.
These are short-term debt instruments often sold by independent insurance agents
and issued by little known or non-existent companies promising high returns –
upwards of 15 percent monthly – with little or no risk. In June, four Georgia-based scam artists were each sentenced to 17 ½
years in prison for recruiting independent insurance agents to sell millions of
dollars worth of bogus promissory notes. While investors were promised
nine-month returns as high as 21 percent, half of each investment went straight
to commissions that were divided among company principals and sales agents.
Acting on a tip from the Better Business Bureau, Georgia securities regulators
seized nearly $5 million of the $8 million stolen from local investors and,
together with federal investigators, used the evidence uncovered to broaden
their investigation and prepare criminal charges. In the end, the Federal Bureau
of Investigation, working with Georgia regulators, found the ringleader –
Virgil Womack – had scammed over $150 million from investors nationwide. Of
the $150 million, nearly $90 million was seized and returned to investors. The
average age of the victims was 68. In another case, a Maine court sentenced an insurance agent to seven
years in prison for running a promissory note scam that took 25 investors for
more than $1 million. The agent, who was sentenced in June, told investors the
notes were “better than certificates of deposit and life insurance
policies,” regulators said, and that they would yield 10 percent to 12 percent
returns annually. “A 12 percent return may not seem over-the-top by bull market
standards, but it’s far more than banks are offering now for insured
deposits,” said Chris Bruenn, administrator for the Maine Office of Securities
and NASAA’s president-elect. 5.
“Prime bank” schemes.
Scammers promise investors triple-digit returns through access to the investment
portfolios of the world’s elite banks. Purveyors of these schemes often target
conspiracy theorists, promising access to the “secret” investments used by
the Rothschilds or Saudi royalty. In Texas, a Harlingen-based con artist promised returns of 6 percent to 8
percent a month through a secretive web of money dealers supposedly set up by a
coalition of governments in 1914 to pay for World War I debt. In videotape shown
at Monday’s press conference, the promoter claimed that seven “world
traders” control the entire global money supply. In the end, the scam took
over 300 investors for roughly $6 million. 6.
Viatical settlements.
Originated as a way to help the gravely ill pay their bills, these interests in
the death benefits of terminally ill patients are always risky and sometimes
fraudulent. The insured gets a percentage of the death benefit in cash and
investors get a share of the death benefit when the insured dies. Because of
uncertainties predicting when someone will die, these investments are extremely
speculative. In a new twist, Pennsylvania regulators say “senior
settlements” – interests in the death benefits of healthy older people –
are now being offered to investors. In June, 15 individuals were indicted in connection with a scam that cost
hundreds of investors nationwide at least $100 million. State securities and
insurance regulators, together with federal regulators, allege the individuals,
employed by Liberte Capital Group, were involved in a scheme to buy life
insurance policies from terminally ill individuals who lied to insurance
companies about their medical conditions. Liberte managers used investor funds
to support lavish lifestyles, including investments and the purchase of large
homes and dozens of boats and cars. A receiver has been appointed in the case. 7.
Affinity fraud.
Many scammers use their victim’s religious or ethnic identity to gain their
trust – knowing that it’s human nature to trust people who are like you –
and then steal their life savings. From “gifting” programs at some churches
to foreign exchange scams targeted at Asian Americans, no group seems to be
without con artists who seek to take advantage of the trust of others. In Alabama, nine individuals have been charged with scamming parishioners
at the Daystar Assembly of God church in Prattville out of more than $3 million.
Investors were told their money would be used to purchase retirement properties
in Florida. The income generated by the Florida properties would be used to
payoff the mortgage of the Prattville church and build a religious theme park,
investors were told. In reality, state securities regulators allege, the money
went to pay off investors in a previous scam and to purchase equipment for
unrelated businesses. 8.
Charitable gift annuities.
These annuities are transfers of cash or property to a charitable organization.
The value of the annuity is less than the value of the cash or property, with
the difference constituting a charitable donation. While most annuities offered
by charitable organizations are legitimate investments, investors should be
cautious of little-known organizations or those that provide only sketchy
information. In Arizona, regulators uncovered a scam that took 430 investors
nationwide for an average of $133,000. The scam involved the purchase of
charitable gift annuities from the Mid-America Foundation. According to
regulators, Robert Dillie, founder of Mid-America, ran what amounted to a $54
million Ponzi scheme through a network of independent insurance agents,
financial planners and accountants. Dillie used investors’ funds to purchase
three homes in Las Vegas, a ranch in South Dakota, pay child support, book
charter flights and support his extensive gambling. Magdalena Scheller, 68, of Phoenix, invested more than $400,000 in
Mid-America. A life insurance agent approached her after her husband died.
“It makes you wonder if there are any honest people out there,”
Scheller said at Monday’s press conference. “Unfortunately, Mid-America is not an isolated scam,” Mark Sendrow,
director of securities for the Arizona Corporation Commission told reporters
Monday. “We are looking at two more foundations in the Phoenix area which have
issued millions of dollars of charitable gift annuities in the last few years,
and both were basically penniless before they began issuing them.” 9.
Oil and gas schemes.
These scams follow the headlines, rising in frequency with predictions of oil
shortages or a rise in natural gas prices. In Arkansas, securities regulators
forced Energy Consultants and Ark-La-Tex Consulting Co., L.L.C. to discontinue
their marketing efforts after finding a natural gas well touted to investors as
a ‘can’t lose’ opportunity hadn’t produced in years. 10.
Equipment leasing.
While the majority of equipment leasing deals are legitimate, thousands of
investors have been scammed by individuals selling interests in payphones, ATMs
or Internet kiosks. In a typical equipment leasing scam, a company sells a piece
of equipment through a middleman. As part of the sale, the company agrees to
lease back and service the equipment for a fee. Investors are promised high
returns with little or no risk. But state regulators say high commissions paid
to salesmen and promised returns that are unrealistically high doom many
projects. In North Carolina, regulators took action against an individual who
sold an Internet kiosk to an investor for $24,950, promising a 17 percent
return. The individual had previously sold payphone leases to investors from a
company that later filed for bankruptcy. Before investing, state securities regulators urge investors to call their offices and ask if the individual selling the investment is licensed to do so. Regulators say investors can also save themselves a lot of grief by asking a second question – whether the investment itself is registered. To check out an investment or salesperson, contact your state securities regulator. See NASAA online at www.nasaa.org.
International
Trade Minister Pierre Pettigrew announced the appointment of the Small and
Medium-Sized Enterprises (SME's) Advisory Board on International Trade. The
Board held its inaugural meeting in Ottawa in June 2002. The
Board will act as a voice for other SME's and will serve as a forum for testing
new programs and services available to them. It will also advise the Minister on
ways to assist them in exporting their products and services. "SME's
play a critical role in Canada's export performance and economic growth,"
said Mr. Pettigrew. "Maintaining the ongoing dialogue between the
Government of Canada and SME's is crucial to understanding their changing needs.
The Advisory Board will help us ensure that Canadian SME's are in the best
position to take advantage of market opportunities." It
is estimated that 87% of Canada's exporters are SME's. They are responsible for
about 6% of the dollar value of Canadian exports. In 2001, total Canadian
exports of goods and services amounted to $471 billion, representing 43% of
Canada's gross domestic product. The
Board was created after the Minister's SME Task Force completed its three-year
mandate in September 2001. The Chair of the Task Force, Bianca Battistini,
Executive Vice-President of Can-Am Immigration Services Inc. of Sherbrooke,
Quebec, has agreed to continue as Chair of the Advisory Board. The
17-member board, made up of senior executives of small- and medium-sized
companies from across the country, has a three-year mandate. Its next meeting
will take place in Vancouver, British Columbia, in October 2002.
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