Category: San Diego

August 19, 2010

Investoradio Interview

I’ll be on Investoradio this Saturday, Aug. 21, talking about Ray Lucia and high fees. You can listen online through this link. Just like Lucia, Investoradio hosts Tom Cock and Don McDonald run their own investment advisory, but their fees are less than 1 percent, compared to as much as 2.9 percent for RJL Wealth Management.

Here’s a link to the show.

August 19, 2010

Investoradio Interview

Here’s a link to the show.

August 16, 2010

Introducing Union-Tribune bathroom tissue…

One year into its new ownership under LA billionaire Tom Gores and his Platinum Equity, The San Diego Union-Tribune preparing to roll out its new re-design Tuesday.

Publisher Ed Moss has promised to do more with less. He’s making good on the latter, although he has yet to deliver on the former.

The paper that lands on your doorstep tomorrow will be a “bit” narrower, according to Publisher Moss, who assures us it will also be “more efficient” — newspaper doublespeak for less wordy.

Newspapers are shrinking across the country to save on the costs of newsprint, which is what they call the actual paper that lines birdcages and can be shaped into funny hats. The print of U.S. newsprint is up to 14 percent this year. That’s still well below what Canadian mills need to make a profit.

How narrow will the U-T get?

The Union-Tribune currently measures about 12 inches, the same width of the Wall Street Journal and other big newspapers.

It’s likely to follow the LA Times, and the North County Times which all shrank in February to 11 inches. Any smaller will invite mockery.

Unlike the LA Times, however, the Union-Tribune will be changing to a (presumably larger) typeface.

We all learned in grade school that shrinking margins and bigger writing is the way to make your paper seem longer than it actually is.

Consultants tell newspaper executives that readers don’t really care about the width of the page and some even like it. In the short run, that may be true. In the long run, it means there’s even less in the newspaper. Which means there’s more of a reason to look elsewhere for news.

But there’s … more. The U-T is promising more emphasis on graphics and photos, which will further crowd out all the refocused news and investigations they are promising us.

That’s the funny thing about doing more with less. The only thing you can do with less is less.

August 13, 2010

The "Buckets of Money" Seminars: Who Pays?

Ray “Buckets of Money” Lucia, the host of an investment radio talk show, has been going around the country hosting retirement seminars with actor Ben Stein.

The seminars are free to attend, but they’re not free. Someone is paying for them. If you’re considering investing with Lucia, it’s important to understand that the person who may wind up paying is you.

Money for the “Buckets of Money” seminars comes out of the pockets investors in RJL Wealth Management, according to Lucia’s own client disclosure.

In addition to being the main sponsor of Lucia’s seminars, RJL Wealth Management advertises on his radio show. It pays Lucia a fee for referring potential clients. It also pays him hourly consulting fees. The amount of this compensation is not disclosed.

RJL manages more than $300 million in assets in 4,880 accounts, according to its filing with federal regulators.

As I noted in an earlier post on Lucia’s fees, the RJL Wealth Management Program charges staggeringly high fees of as much as 2.9 percent annually.

Lucia’s SEC disclosure states that for his solicitation and consulting, he receives a portion of the fees collected by RJL Wealth Management that “shall not exceed 1 percent” annually. One percent of $300 million is $3 million a year.

You would be forgiven that Lucia is essentially paying himself. In fact, Lucia is being paid by his son, Ray Junior, who runs RJL Wealth Management. Dad is listed as a consultant and member of the advisory board (along with Ben Stein).

The arrangement between the Lucias leads inexorably to a conflict of interest.

Both Lucia junior and senior are SEC registered investment advisers. Registered investment advisers are considered fiduciaries, which means they have a legal duty to put their clients’ interests first. So whose interests come first clients or Lucia father and son?

I think the answer can be found in a complaint against Lucia Senior that was filed with the Financial Industry Regulatory Authority in December.

An unnamed client accused Lucia of breach of fiduciary duty for failure to execute stop loss orders in between June and December 2008 when markets plummeted in the depths of the financial crisis.

The client claimed $24,631 in damages. Lucia settled for $18,000 for “business considerations in order to avoid the cost of arbitration,” according to FINRA.

According to FINRA’s summary of the case:

Mr. Lucia was listed as a joint representative on the account for administrative purposes, but did not interact with the client and made no recommendations or representations, as those alleged or otherwise.

In other words, Lucia really had nothing to do with the account or the client. His name was on the account only “for administrative purposes.”

Caveat emptor.

August 6, 2010

Is Relational Investors' Ralph Whitworth Worth His Big Paycheck?

Do as I say, not as I do.

Ralph Whitworth of San Diego’s Relational Investors LLC is back in the news because he thinks Occidental Petroleum’s chief executive makes too much money.

Whitworth is teaming up with CalSTRS, the massive California State Teachers Retirement System, to boot out board members who approved paying CEO Ray Irani $857 million over the past 10 years.

Executive pay is an important issue. Irani sure does make a lot of money; but then again, he has made a lot of money for shareholders.

No one seems to be asking a fundamental question: Who is Ralph V. Whitworth. What qualifies him as an expert on excessive pay? How much does he make? What socially useful service does he perform? How does his business compare with the executives he criticizes?

Unlike publicly-traded Occidental Petroleum, Relational Investors is a private limited liability company organized in Delaware. It isn’t required to disclose salaries.

Judging by his assets and his lavish lifestyle, there’s an irony in Whitworth complaining about excessive pay: It’s the proverbial pot calling the kettle black.

Outside of the boardroom, Whitworth is perhaps best known for paying Paul McCartney $1 million to play at a 50th birthday bash in Rancho Santa Fe for his wife, Wendy, Larry King’s CNN producer.

Wendy filed for divorce less than a year later. In divorce papers, she described her and Ralph’s exceptional lifestyle:

“For the last four years of our marriage, we have enjoyed a very lavish lifestyle, including multiple luxurious residences, traveling exclusively on private planes, taking luxurious vacations, buying designer clothing, and essentially partaking of, and enjoying, the best of everything that life has to offer. We have had the good fortune of not having to consider the cost of goods and/or services as money has truly been no object in our daily lives.”

Relational Air

The Federal Aviation Administration’s database shows Relational Investors LLC has registered a pair of Falcon 2000 business jets. One of them flew Thursday from San Francisco to Sacramento, and recently flew from San Diego to Montana and back in a day, according to the flight tracking service, FlightAware.

San Diego County real estate records show Whitworth has indeed been keeping up with his superrich neighbors. His two homes in the San Diego area — one in posh Rancho Santa Fe and another along the La Jolla coast — have a combined assessed value of more than $16 million.

Then there’s Whitworth’s massive collection of dragsters, hot rods and funny cars. He had planned to open an automotive museum in his home state of Nevada, but changed his mind and auctioned some of them off for nearly $7 million last year. See if you can guess which one of the cars below sold for $550,000:

Finally, whatever Whitworth’s salary is, you can bet he pays a lower tax rate than Irani and most Americans do. Relational Investors, unlike Occidental Petroleum, is a partnership. Under a tax loophole, a managing partner like Whitworth is taxed at low 15% capital gains rates. Whitworth’s eight-figure income is considered a return on investment, not compensation for services, even though it is CalPERS and CalSTRS who have put up most of the money for Relational Investors.

Whitworth’s wealth derives from the $6 billion he manages for pensions in California, North Carolina and Alaska, among others — or more precisely the 20% “incentive fees” he is paid for beating the S&P 500, which he has done with some consistency, to his credit.

Relational’s strategy is to buy up a large position of underperforming companies and then force changes with the goal of unlocking unrealized value. In 2006, Relational locked horns with The Home Depot, leading the home improvement chain to dump its chief executive, who left with a $210 million “severance” package.

Relational Investors is headed by Whitworth and David Batchelder, who met while working in the 1980s for Texas oilman and corporate raider T. Boone Pickens.

CalPERS became Relational’s first big investor in March 1996 and remains its biggest backer today, with about $1.5 billion invested. Relational’s “activist” investing strategy has yielded annual returns of 10.77%, according to a March 31, 2001 study conducted by Wilshire Consulting on behalf of CalPERS. That means $100 invested in Relational in 1996 would be worth $415.02 today.

(By comparison, you could have doubled your money investing the same $100 in Occidental Petroleum over the past decade decade later).

Relational charges a 1.5 percent fee and receives an incentive fee of 20 percent for beating the S&P 500 Index.

The biggest problem with Relational, however, isn’t Whitworth’s personal spending or his fund’s fees or performance, but a deeper, more troubling conflict-of-interest:

Whitworth warns public corporations to avoid even the appearance of conflicts, but his investment firm doesn’t practice what it preaches.

Officials from CalPERS and other funds that invested in Relational wound up with jobs, consulting contracts and corporate directorships, courtesy of the San Diego fund. These ties give the appearance that Relational Investors offers rich rewards for those who help it secure investments.

Relational’s origins came under scrutiny earlier this year when documents posted by CalPERS revealed Relational paid nearly $17 million to a little-known New York firm called Tullig Inc. (formerly Donal J. Murphy Associates) to help secure an investment from CalPERS. The pension fund launched an investigation.

A review of public documents and interviews shows that Tullig Inc. isn’t the only one who has profited from Relational.

The San Diego money management firm has put several pension officials on its payroll and on corporate boards under sometimes questionable circumstances:

Former treasurer of North Carolina Richard Moore steered $500 million in state retirement funds to Relational Investors in August 2008 and then joined the San Diego firm in April 2009 as a managing director. Whitworth has said that Moore’s hiring was unrelated to the pension’s investment. North Carolina paid Relational $6.6 million in fees last year under a generous fee agreement.
In 2004, Relational hired James Hearty, the former executive director of the Massachusetts pension system who left after a high-profile battle with Treasurer Timothy Cahill. At the time, the $32 billion Massachusetts Pension Reserves Investment Management system (MassPRIM) was considering an investment in Relational. (The deal later fell through.)
Beverly Benedict Thomas, a Los Angeles-area political consultant who also serves as a placement agent, received a fee of nearly $1 million for helping Relational land a $300 million investment in 2008 from CalSTRS, the California teachers’ retirement system. Thomas, a former assistant treasurer under California Treasurer Kathleen Brown served as a member of the board of CalPERS and CalSTRS from 1993 to 1995, according to regulatory filings with the SEC.
Relational has also doled out board seats to former CalPERS officials. The firm tapped Thomas and Richard H. Koppes, former CalPERS general counsel, for board seats on Apria Healthcare Group. and installed Sheryl Pressler, another former CalPERS official, on the board of Nuevo Energy, another company in which Relational had a big stake.

None of these moves was illegal, but Relational’s questionable relations have been largely ignored here in California.

They deserve careful scrutiny. The pension world has been rocked by a “pay for play” bribery and kickback scandal that started in New York and prompted reforms at CalPERS, which has issued new rules and hired a law firm to review the activities of placement agents.

Change is coming to the pension world, but it doesn’t seem that Relational has gotten the message.