Although many stories have circulated on the Internet, the
fact is that as of September 2012, five years after Absolute Capital Management
Holdings’ (ACMH) Chief Investment Officer, Florian Homm resigned, nothing has
been actually proven which shows that Homm was guilty of any crime or breached
any of his duties as CIO. The purpose of
this memorandum is to review the allegations against Homm in a calm and
reasoned manner and to show that he is innocent of any criminal wrongdoing.
Background
1. ACMH was a
fund management company that was listed on the AIM segment of the London Stock
Exchange. The business of ACMH was to
manage investment funds, for which it earned a management fee. As is customary, these fees came in two types
– a flat management fee for overseeing the fund, based on a percentage of the
fund’s total value, and a success fee, based on the fund’s performance. ACMH created and ran several funds with
different investment objectives. Almost
all of the funds were highly speculative in nature.
2. Florian Homm
was ACMH’s Chief Investment Officer.
Generally speaking, he was responsible for overseeing the investment
strategies of ACMH’s various funds – although he was the actual fund manager of
only a few of the funds. To assist Homm in
his role as CIO – and the other fund managers in their roles, ACMH also
employed numerous analysts and other investment professionals.
3. Although
Homm was one of the founders of ACMH and (through his family) a major
shareholder (approximately 25%), he was not a member of ACMH’s Board of
Directors. Nominally, Michael Kloter was
Homm’s representative on the ACMH Board – however, Homm was not in a control
position at ACMH and there was no legal obligation that he have Board
representation. In fact, Kloter was
completely independent of Homm and remained on the Board long after Homm’s
resignation.
4. The reality
is that Homm had very little say in the management and operations of ACMH as a
company. Sean Ewing was CEO of ACMH and often
ran the company contrary to Homm’s wishes.
The CFO of ACMH, Darren Sisk, was a Ewing hire and was generally at odds
with Homm. In June 2007, when Homm tried
to get real representation on the Board, by suggesting that his personal lawyer
have a seat, he was opposed by Ewing and unable to force the appointment.
5. Likewise,
Homm had almost no role in the administration of the funds.
A. Each fund
was its own legal entity and each had an institutional fund administrator
(originally BNY, but later Fortis).
B. Homm had no role
in approving subscriptions to the funds.
Each investor had to fill out fund documentation, which was prepared by
the funds’ lawyers, and each subscription was reviewed by the Fund
Administrator (to comply with “Know Your Client” regulations, etc.) before
being accepted.
C. Homm had
absolutely no control or signature power over any of the funds’ bank or
brokerage accounts. All trading was done
through ACMH’s trading desk. In the case
of original subscriptions (i.e. where the funds would buy shares directly from
the issuing companies), wires would be initiated by the relevant fund’s
administrator.
D. Homm had
absolutely no control over the calculation of the funds’ Net Asset Value (NAV)
calculation, which was done each month by the funds’ administrators, nor did he
have any control over the funds’ audits.
ACMH’s “Big Lie”
1. Almost all
of the accusations against Homm derive from the actions of ACMH following
Homm’s resignation. Homm’s position is
that he resigned due to differences with ACMH’s management. Although it was not Homm’s intention to
negatively affect ACMH (in his resignation letter he noted that he was still
the largest shareholder and had every reason to see ACMH succeed), the
announcement led to a significant drop in ACMH’s share price and a wave of
redemption notices.
2. In the
perception of many investors, the reason that they had for investing in ACMH
funds – to take advantage of Homm’s skill as an investment professional – was
now gone. This was the reason for the
first wave of redemption requests.
3. ACMH’s
response to the drop in the share price and the redemptions was not to try to
get Homm back on board (in fact, ACMH scheduled a conference call with Homm the
day after the resignation - and then failed to call in), but to manufacture an
excuse for Homm’s resignation. This
caused not only a further (and greater) drop in ACMH’s share price, but turned
the wave of redemption requests into a flood.
4. ACMH’s “Big
Lie” consisted of two parts. The first
was that immediately upon leaving, ACMH “discovered” that the ACMH finds held
large positions of “Illiquid” shares.
The second was that Homm had secretly hid his 50% ownership of Hunter
World Markets, one of the brokers that the ACMH funds used.
5. Both of
these statements were not credible at face value for the following reasons:
A. The “discovery” of the illiquid shares
was not credible because:
i. Each of the funds was both
administered and audited by outside entities.
It is simply not possible for the administrator and auditor not to have
detailed knowledge of each fund’s positions.
In fact, it is impossible to calculate an NAV without having a precise
accounting of the fund’s positions and the value of those positions. Furthermore, investors in the funds received
periodic updates from ACMH that disclosed these positions (many of which had
been held for a considerable amount of time).
Also, ACMH often filed regulatory documents disclosing these positions.
ii. The very concept of “illiquidity” is
malleable. All of the “illiquid”
positions were in US companies on the OTC:BB or Pink Sheets, but all were
reporting companies under US law and all were operating companies. As a result, their disclosure requirements
were often far more stringent than large cap European listed companies. Furthermore, the liquidity of the OTC:BB and
Pink Sheets often exceeds that of European markets. The fact is that if there are more sellers
than buyers, a share’s price will go down, regardless of the perceived
intrinsic value of a company – as was shown a few months later, during the 2008
crash, when billions of dollars of value was wiped off of large cap companies. In this case, ACMH’s management created its
own liquidity crisis, by turning the first wave of redemptions into a flood, making
it impossible for the funds to unwind their positions in an orderly manner. There is no evidence that these companies
would not have maintained their value, but for the selling pressure created by ACMH’s
own panic.
iii. The statement that the companies were
“illiquid” was equated with the idea that there was something wrong with the
funds having positions in these stocks.
In fact, neither ACMH or the SEC has ever directly alleged that the
positions were de facto violations of
any of the individual funds’ mandates.
iv. The statement that the companies were
“illiquid” was also equated with the concept that somehow their market value
was not an accurate representation of their value for NAV calculation
purposes. In fact, many “illiquid”
companies ultimately are purchased at valuations far above their quoted
price. Again, it was the fund
administrators that determined the NAV, not Homm.
v. Finally, the fund administrators and
auditors were necessarily fully aware of the trading between the different ACMH
funds and were in a position to question the trades had they thought that they
were creating an NAV other than one which accurately reflected the value of the
positions.
B. The statement that Homm “hid” his
interest in HWM was also not credible because:
i. Homm held the HWM interest in his own name (in contrast to even his
ACMH shares, which were held in a trust).
This holding had to be cleared by FINRA in the US, and was publicly
searchable within seconds on FINRA’s own “Broker Check” website. Homm’s interest in HWM was also disclosed in
company filings listing Homm as a beneficial owner of HWM.
ii. Furthermore, Todd Ficeto openly used
Homm’s ownership of HWM as a marketing tool with HWM’s investment banking
clients and this was often discussed when those companies met with ACMH
analysts – with Ficeto present – in Mallorca.
Homm often left the discussions so as not to unduly influence the ACMH
analysts. (It is also worth noting that HWM’s former name had been VMR Capital
Markets US, a reflection of the fact that it had previously been owned 50% by
Homm’s previous fund management company, VMR, dating back to 1998. Clearly the long-term relationship between
Homm and Ficeto was well known to all of the relevant personnel at ACMH.)
iii. Homm’s interest in HWM was the only
logical reason that ACMH would even trade through a small broker like HWM (its
other brokerage relationships were with major international brokerage
houses). However, at the same time, HWM
was under constant pressure to exceed the performance of ACMH’s other brokers
by providing superior execution of orders at a lower commission.
iv. Additionally, it is worth noting that
Homm’s physical set up at ACMH was such that his only email address was his
ACMH email, his only computers were company owned, and he was situated in an
open plan office in Mallorca. Even his sole mobile phone was owned by ACMH. All of his
activities were out in the open and easily discoverable by ACMH.
v.
Finally, and most importantly, in
mid-2006, assuming Homm had been trying to hide his ownership interest in HWM,
it was “outed” to ACMH by Darius Parsi, in a letter to clients and ACMH (the
“Parsi Letter”). The Parsi Letter was
the subject of a board meeting of ACMH, as well as numerous discussions between
Homm and Sean Ewing, the CEO of ACMH.
Obviously, from this point forward, ACMH could not claim to be ignorant
of Homm’s interest in HWM – in fact, ACMH also had discussions with several
investors who had been sent the Parsi Letter.
But the crucial point is that no one at ACMH ever instructed either Homm
or any other fund manager or trader at ACMH that there was anything improper
about continuing to do business with HWM.
6. Because Homm
believed that ACMH’s accusations were unlikely to withstand any critical
examination, a few days after tendering his resignation Homm, through his
lawyer, negotiated with the ACMH Board that there would be no further
communications disparaging each other, in the belief that this would put an end
to the matter. Homm kept to his side of
the bargain, but ACMH did not, in that Jonathan Treacher (now the CEO of ACMH)
continued to make statements that put Homm in a negative light. Each time that Homm’s lawyer complained,
ACMH’s in-house counsel, Glenn Kennedy, would answer that the statements were “probably
made before the agreement” and that ACMH would refrain from making any more
public statements.
7. Additionally,
within a few days after his resignation, Homm was approached (through his
lawyer) by Andreas Rialis, an ACMH Board Member, with an offer to by a significant
portion of Homm’s holdings at a large discount to the market price (already
seriously depressed by the resignation and subsequent ACMH announcement). At the urging of ACMH’s Board, which stated
that it would help stabilize ACMH, Homm agreed.
It is doubtful that this type of communication or transaction would have
taken place had ACMH taken its own accusations seriously.
8. Finally,
throughout 2008-2010, ACMH was in regular communication with Ficeto and HWM
regarding disposal of US shares, including the so-called “illiquid” companies –
again, behavior inconsistent with its allegations that it had been defrauded by
HWM.
The Investor Lawsuits
1. Following
the events of September 2007, only two investors filed lawsuits. One was Jack Grynberg and the other was
Cascade Fund. These investors were
nominally related and were both from Colorado.
2. Grynberg
originally sued only Homm, Ficeto and HWM in U.S. District Court in Colorado,
but ultimately withdrew his lawsuit and refilled in State Court in California. In the state court case, Grynberg only
alleged state law tort claims and did not allege any violations of US
Securities Laws. In 2011, the case went
to trial and both Ficeto and HWM won complete dismissals on the basis that no
evidence was presented. There was a $1.5
million judgment awarded against Homm – although this was probably because he
did not appear at the trial to defend himself.
It is also worth noting that, arguably, he has not been properly served
and if any there was any attempt to enforce the judgment, Homm presumably would
move to vacate it on the same grounds as HWM.
3. Cascade sued
not only Homm in US District Court in Colorado, but also ACMH and the
individual funds that they had invested in (although not Ficeto and HWM). The claims were based on violation of US Securities
laws. ACMH vigorously defended the
lawsuit. ACMH’s main line of defense was
that the recently decided US Supreme Court case of Morrison barred suits like Cascade’s because the funds were non-US
funds and the alleged violations all took place outside the US. ACMH prevailed on this argument and the
Cascade suit was dismissed against all defendants.
The ACMH Funds’ Lawsuit and Its Illogic
1. Although
ACMH was: (a) in the process of winning the Cascade case, (b) not subject to
any enforcement action by any authority under which it was regulated or any
territory where it operated, (c) not being sued by any other investors; in
November 2009 the ACMH Funds informed their investors that they were going to
use fund assets to sue Homm in order to recover damages. In October 2009, the ACMH Funds filed a
lawsuit in US District Court in New York against Homm, Ficeto, HWM, Heatherington,
Ewing, and Ulrich Angersbach (an employee of ACMH).
2. Procedurally,
the Court dismissed the case for lack of subject matter jurisdiction under Morrison. The ACMH Funds appealed the case to the U.S.
2nd Court of Appeals which reversed the decision based on the fact
that Morrison was decided after the
ACMH Funds had filed their complaint and, therefore, the ACMH Funds should be
allowed to amend their complaint to try and plead facts consistent with Morrison. The case was remanded and the ACMH Funds
re-filed their complaint in July 2012.
Interestingly, the amended complaint contains the Parsi Letter – which
is a de facto admission as to when
ACMH (and by extension its funds) actually knew many of the facts it claims to
only have discovered upon Homm’s resignation in September 2007.
3. Because the
court originally dismissed the case for lack of subject matter jurisdiction (under
Morrison), it did not discuss the
other preliminary issues raised by the defendants, including the Statute of
Limitations and the personal jurisdictional defenses. Likewise, the defendants have raised the same
defenses (including Morrison) to the
amended complaint – and these have a strong chance of success. If they do, the case will be dismissed
without any findings on the merits. However, it is worth discussing the fact
that the ACMH Funds’ claims against Homm have no legal basis – and, if they,
do, create the same liability for ACMH, its Funds, and its management as a
whole.
A. The positions in so-called “illiquid”
stocks were well within the mandates of the funds. There was no inherent violation of the fund
mandates in these positions (i.e. the funds were not prohibited from taking
these positions). Furthermore, several
previous positions, which could easily be characterized as “illiquid” using the
plaintiff’s criteria, were sold off at a profit (such as Novint).
B. Each of the fund prospectuses disclosed
to investors that self-dealing between the fund and fund managers was
permissible. In fact, all of the
so-called self dealing was where the funds bought shares at a discount to market.
C. It is a simple fact that Homm’s
interest in HWM was transparent, publicly available, and actually known to ACMH by its own admission no later than mid-2006. There was no violation of the fund mandates
in using a broker where Homm had an interest and it is simply not true that
ACMH paid HWM any more in commissions than it would have any other broker.
4. The single
biggest conceit of the ACMH Funds’ lawsuit is that it somehow divorces any
potential liability of Homm, Ewing, et. al. from the liability of the ACMH and
all of its directors as a whole. Put
more simply, if allegations lead to civil liability (it is not a criminal case)
– how are the plaintiffs in this case any less guilty or culpable than the
defendants? The truth is that the case
defies logic. The ACMH Funds are suing
employees of their own fund manager (ACMH) for defrauding them by increasing
their own value! This is absurd for the
following reasons:
A. One of the
main allegations in the case is that all of the trading served to
“artificially” increase the NAV. But who
gains from “artificially” increasing the NAV? Interestingly, one group is
investors who redeemed their investments prior to the market crash in September
2007. In fact, many investors made money
in ACMH Funds. But aside from that, who
else benefits? As even the lawsuit points
out, the only entity that benefits directly is ACMH itself, through increased
management fees, which were charged as a percentage of funds under management. Homm only benefitted indirectly – arguably
through bonuses and an increase in the value of ACMH’s shares. Moreover, 100% of the increased management
fee was certainly not passed through as bonuses (certainly some went to ACMH’s
expenses). There’s really no straight
line correlation between the fund performance and Homm’s bonuses, which was
calculated on a variety of factors and was part of a general management pool – actually,
Homm gave up his bonuses in 2007 to the other fund managers. There’s even less of a correlation between
the ACMH Fund’s NAV and ACMH’s share price on AIM, which is obviously affected
by external factors, and Homm was far from the only shareholder in ACMH. In
fact, the only entity that actually benefited monetarily, by a definitive
amount, was ACMH itself – so why didn’t the ACMH Funds sue ACMH – the entity
that actually received the increased management fee?
B. Even the
“self-dealing” worked to the benefit of ACMH.
As noted above, Homm never sold shares to the funds for anything other
than a substantial discount to market.
Either the shares were worth market value (and this was determined by
the ACMH Fund’s own administrator and auditors). The only way these transactions were
fraudulent is if the “real” value of the shares was below the sale price, in
which case AMCH itself was a prime beneficiary of such “fraud” through the increased
management fees that it received. So
again, why are the ACMH Funds not suing ACMH?
5. Ironically,
when ACMH itself was sued by an investor (Cascade), it defended
vigorously. This gives rise to a number
of questions. If it believes that Morrison did not apply, why did it
successfully defend on those grounds?
But more importantly, why did it defend at all? Why not pay back the management fees and
distribute that to investors? Why did
they not sue all of the directors of ACMH who were all necessarily liable if
their own accusations were true? The
reality of the ACMH Funds’ lawsuit is not that it is intended to benefit
investors, but the current management of ACMH, which is looking to cover up its
own incompetence and malfeasance and to prolong their management fees. Investor funds are being depleted on an
ill-conceived lawsuit that has prolonged the funds final distribution to
investors. In addition, it is likely
that the manner in which the lawsuit was filed was a violation of the ACMH
Funds’ mandates regarding proper use of fund assets.
The SEC Enforcement Action
1. In February
2011, more than three years after the fact, the US SEC filed an enforcement
action against Homm, Ficeto, HWM and Colin and Greg Hetherington. The action alleges that they are guilty of
“Portfolio Pumping” and basically states similar facts as the ACMH Funds’
lawsuit.
2. Curiously,
the SEC failed to name either ACMH, the ACMH Funds’ or its then CEO Ewing, as a
defendant. It is curious because the
main allegation is “Portfolio Pumping”, i.e. that the defendants’ actions
“artificially” inflated the ACMH Funds’ NAV’s.
A search of the SEC litigation release database shows only three other
enforcement actions ever alleging
“portfolio pumping” and in all cases the management company and the funds
themselves were named as defendants. (SEC
v. MICHAEL LAUER, LANCER MANAGEMENT
GROUP, LLC, and LANCER MANAGEMENT GROUP II, LLC; SEC
v. BURTON G. FRIEDLANDER, FRIEDLANDER INTERNATIONAL LIMITED, FRIEDLANDER
MANAGEMENT LIMITED, FRIEDLANDER CAPITAL MANAGEMENT, FRIEDLANDER LIMITED
PARTNERSHIP, AND OPAL INTERNATIONAL FUND; and SEC v. MEDCAP
MANAGEMENT & RESEARCH LLC and CHARLES FREDERICK TONEY, JR.) This only makes sense because the SEC
is supposed to protect investors’ interests and, as described above, the only
direct beneficiaries of the “portfolio pumping” was ACMH and the ACMH Funds
themselves. Likewise, Homm was only one of the indirect beneficiaries who would
benefit from the increased management fees, and at all times the CEO of ACMH (Ewing)
knew and approved Homm’s trades and interest in HWM.
2. It is worth
noting that the entire matter really does have minimum impact in the US. Very few of the ACMH Funds’ investors were
American. The funds were domiciled in
the Cayman Islands and operated out of Spain and England, with a sales office
in Switzerland. The ACMH Funds traded in
US Stocks and had US Dollar denominations and, as a result, used US brokers and
clearing banks, but the truth is there is very little US connection. ACMH had successfully invoked the Morrison defense in Cascade and had its own case dismissed on the same grounds in New
York (although overturned to allow it to re-plead). The defendants filed the same motion against
the SEC, but the judge in this case did not agree and held that because the
trades were on the OTC Bulletin Board, there was subject matter jurisdiction.
3. Putting
aside preliminary matters such as jurisdiction, the main thrust of the SEC case
is, again, that Homm, and the other defendants, defrauded the funds and
investors by self-dealing and “artificially” inflating the NAV. However, if all of Homm’s trades were
approved and known by ACMH it is very hard to see how there is any legal
liability on Homm’s part. Homm is not
accused of any “pump and dump” scheme – neither the ACMH Funds nor Homm are
accused of selling these shares into the market. If both the buyer and the seller agree that
the price is fair, then where is the fraud?
The SEC has to argue that both the buyer and the seller were conspiring
to inflate the price of the “illiquid” shares artificially – but if it was, how
come no-one tried to short these stocks?
4. Likewise,
all of Homm’s sales into the fund were transparent, non-market trades at a
discount (because they were big blocks, the ACMH Funds, their administrators,
and their auditors knew, or could have asked, who the sellers were). Again, if they were truly sold at a discount,
it is hard to see how there was any fraud and the ACMH Funds or their investors
were damaged.
5. Also, the SEC case is based on faulty calculations which look at only gross profits and do not take into account trading losses. In addition, Homm is presumed to have made a 50% profit on HWM's gross commissions (as if HWM as a fully licensed brokerage did not have legitimate expenses, pay income tax, etc. before any distribution to shareholders.)
6. Therefore,
the entire SEC case hinges on whether the market valuations of the “illiquid”
shares were reasonable at the time.
Conclusions
1. The first
thing to point out is that Homm has not been charged with any criminal activity
in any jurisdiction. The SEC action is a
civil enforcement action. Likewise, the ACMH Funds’ lawsuit is a
private civil action.
2. Second, any
principle of corporate agency and officer and director liability dictates that
if Homm is guilty of anything, then necessarily ACMH and its funds are liable
to their investors and shareholders.(this is true even if Homm acted outside
the scope of his authority or without the knowledge of his superiors). Yet ACMH successfully defended the one
investors suit filed against it and is left out of the SEC enforcement action,
even though it received direct monetary benefit from Homm’s purported
wrongdoing.
3. Third, Homm
is not a fugitive from the law in any way.
There is one jurisdiction that is conducting an investigation and Homm
is fully cooperating with the authorities in that jurisdiction, although he has
denied any wrongdoing.
4. However,
Homm has been subjected to vicious attacks that are criminal of themselves –
most notably a private detective had offered a substantial award for Homm’s
whereabouts and stated that Homm would be offered a choice of being turned over
to the authorities for arrest or could pay back the money that he owed. However, the people looking for Homm remained
anonymous (why would they do so if they were legitimate victims?) and Homm is not wanted for arrest by any
authorities in any jurisdiction. Therefore, this was simply an attempt to
terrorize and blackmail Homm – an attempt that was aided and abetted by the
Financial Times Deutschland and Der Speigel, which published unproven and ridiculous
allegations (such as that Homm had plastic surgery and stole hundreds of
millions of Euros). These actions would
be laughable, except for the fact that they have made Homm and his completely
innocent family and children a target for nutcases around the world.
5. Ultimately,
the courts in the SEC and the ACMH cases will determine if Homm has any
liability in those matters – not on the basis of internet rumors, but on
evidence presented in a court of law.
And at present – as noted repeatedly above - there are no investor
lawsuits and there are no criminal charges made against Homm – probably because
no investigator has managed to find any evidence – despite the passage of 5
years and the fact that all of Homm’s dealings at ACMH are an open record – of
criminal activity.
6. So, we hope
this brief overview of the facts will helped to clarify reality and put the
rumor mongers on notice that one day, Homm may decide to take legal action
against them.
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