Sat04182015

News

Car breaks through glass door, closes Trader Joe’s for the day

Car breaks through glass door, closes Trader Joe’s for the day

Alicia Castro/Town Crier
Trader Joe's employees survey the damage after a car smashed through the glass doorway earlier today.

Trader Joe’s on Homestead Road is closed for the remainder of the day (April 17) after a car barreled through the glas...

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Schools

Pinewood student writes book about living with autism

Pinewood student writes book about living with autism


Traci Newell/Town Crier
Pinewood School senior Georgia Lyon wrote and illustrated “How to Be Human: Diary of an Autistic Girl” in 2013.

Although first published under a pseudonym, Pinewood School student Georgia Lyon is stepping out to ...

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Community

Sale offers opportunity to 'discover' jewels, fight cancer

Sale offers opportunity to 'discover' jewels, fight cancer

Volunteers and staff at the American Cancer Society's Discovery Shop in downtown Los Altos urge shoppers to "Be A Gem, Buy A Jewel" during the shop's special sale this Friday (April 17) and Saturday (April 18).

The sale is an opportunity to find Mot...

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Comment

Editorial: Let's assume not to presume

Two recent downtown Los Altos stories offer lessons in the drawbacks of jumping to conclusions.

A few months back, the Town Crier published an article on Ladera Autoworks on First Street closing its doors. That part was true, but the reason was not....

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Special Sections

Fitness focus: No holds barred for Los Altos sisters

Fitness focus: No holds barred for Los Altos sisters


Photos Courtesy of Barre 3
Gillian Brotherson, kneeling at left, guides studio instructors through a workout at barre3 Los Altos.

Health is all about balance. That’s what two Los Altos natives learned as they navigated work, motherhood and welln...

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Business

Steinway gallery brings pianos, musicians to downtown Los Altos

Steinway gallery brings pianos, musicians to downtown Los Altos


Alicia Castro/Town Crier
Chrissy Huang, manager of Steinway Piano Gallery in Los Altos, showcases Steinway & Sons’ signature instruments. The gallery plans to host concerts with performers tickling the ivories.

A new downtown Los Altos bus...

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Books

'Pope Joan' Book weaves tale around legend of female pontiff

'Pope Joan' Book weaves tale around legend of female pontiff


The idea that there may have a female pope at one time in history has generated much speculation throughout the centuries. “Pope Joan” (Crown, 1996) by Donna Woolfolk Cross, does not answer the question; rather, the author has created a detai...

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People

GREG STAHLER

GREG STAHLER

Greg Stahler died unexpecdly in his home in Belmont on March 26, 2015. (He was born in Mountain View on June 23, 1972). He will really be missed by three beautiful young children, Haley 7, Hannah 5, and Tyler 3, and his wife Kathryn. He will also b...

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Travel

Cuba libre: Local residents join mad rush of travelers

Cuba libre: Local residents join mad rush of travelers


Natalie Elefant/Special to the Town Crier
Los Altos resident Natalie Elefant noted the vibrant street performances as a traveler in Cuba.

The U.S. restored diplomatic relations with Cuba late last year, enabling Americans to import $100 worth of cig...

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Stepping Out

'Those Darn Squirrels' invading Mountain View

'Those Darn Squirrels' invading Mountain View


Courtesy of Lyn Flaim Healy/ Spotlight Moments Photography
Noelle Merino stars in Peninsula Youth Theatre’s “Those Darn Squirrels.”

The Peninsula Youth Theatre’s world premiere adaptation of “Those Darn Squirrels” is scheduled Friday and Saturda...

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Spiritual Life

Magazine

Food for thought: Hidden Villa programs offer teens training in sustainability on the farm

Food for thought: Hidden Villa programs offer teens training in sustainability on the farm


/Town Crier It’s not all cute and cuddly for teens participating in the eight-week Animal Husbandry Apprenticeship program at Hidden Villa in Los Altos Hills. Mia Mosing of Palo Alto, left, and Sophia Jackson of Los Altos clean the pigpens – one of...

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Inside Mountain View

Home for disabled youth yields greener pastures

Home for disabled youth yields greener pastures


Alicia Castro/Town Crier
Green Pastures staff member JP Mercada, below right, helps Tommy, who lives at the group home, sort through papers and organize his room.

Tucked in the corner of a quiet residential cul-de-sac in Mountain View, Green Pastur...

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What do we mean when we say Ponzi scheme?


Photo By: Town Crier File photo
Photo Town Crier File Photo Court-appointed receivers work at SB Capital, a Los Altos company frozen by a federal investigation.

When the Securities and Exchange Commission (SEC) filed a complaint against Small Business Capital Corp. last month, it claimed that the Los Altos company was operating a Ponzi-like scheme from its San Antonio Road offices.

 

Since then, investors have learned that at least three-quarters of the company’s $42 million assets remain safe in liquid assets and a performing loan portfolio. Yet a federal judge found the SEC’s evidence of fraud compelling enough to grant a preliminary injunction and rule that “good cause exists” to review the allegations.

Interviewing approximately a dozen investors this month, none of whom were willing to identify themselves publicly, the Town Crier heard from many local residents befuddled by the collapse of a company that still, by some measures, appears successful. As many are learning, the term “Ponzi scheme” sometimes describes practices that don’t look exactly like the fraudulent business that originated the phrase in the first place.

When Charles Ponzi launched a pyramid scheme in 1919, he promised investors a 50 to 100 percent return on their investment over a three-month span. His Securities Exchange Company claimed to deal in postal reply coupons but in fact primarily gathered money from an increasing pool of investors and paid that cash out as “returns” to earlier investors. Ponzi’s scheme brought down banks and cheated thousands of investors. But it pales in comparison to Bernie Madoff’s $13 billion pyramid scheme a century later, which incurred 50 times more inflation-corrected loss.

Whether SB Capital and its CEO, Los Altos resident Mark Feathers, committed fraud remains subject to future court hearings. Feathers denies the charges, but until he proves his innocence, a court-appointed receiver will continue to manage and potentially dismantle his business.

The receiver, Thomas Seaman, has taken over SB Capital and could substantially transform the company as he attempts to return money to investors.

Feathers continues to maintain that the company was profitable, and transparently communicating its practices to investors, when seized. He said investors have been ill-served by the cancellation of $10 million in loans scheduled for initiation this month.

In a July 10 filing, Seaman reported that the company held a performing portfolio of loans that continue to bring in money. But he claimed the income flowing into SB Capital was “not alone sufficient to fund monthly distributions to investors.” In other words, SB Capital allegedly exaggerated its profits to investors, paying returns that did not reflect the firm’s intake.

Paying fictitious interest, derived from sources other than genuine profits, is the behavior associated with the term Ponzi-like. But the company was also generating legitimate profits via its relationship with a federal program meant to pump up small business growth across the U.S.

 

Small business loans bring government support

SB Capital had established a specific niche as an issuer of loans through the Small Business Administration, federal government initiatives that provide some of the capital for loans to small businesses. The 504 Loan Program offers small businesses financing for expansion or modernization and is billed as an “economic development” program.

The $10 million in new mortgage loans Feathers mentioned, canceled at the last minute by the receiver last month, had initially received backing from the Small Business Administration. But Seaman reported that the SBA withdrew its support, making the loans a riskier investment.

Licensed lenders like SB Capital invest in tandem with the SBA to offer financing to small businesses in the 504 program, with both sides fronting money for the loan. The loans have requirements – for instance, that borrowers occupy the business in question – which make 504 loans typically high performing because they are directly tied to fixed assets, according to SBA spokesman Mike Stamler.

 

Case targets CEO

The SEC’s case addresses allegedly fraudulent action on the part of SB Capital as a company but also focuses on payments made to Feathers specifically. His personal assets, now frozen, came under scrutiny in court this month.

When Seaman’s agents took possession of SB Capital’s San Antonio Road office June 26, they recovered a $100,000 cashier’s check that raised eyebrows when mentioned in court. The check, payable to Feathers, was allegedly withdrawn at 4:55 p.m. June 26 from Heritage Bank of Commerce. The bank had received an asset freeze order at 3:15 p.m. According to the receiver, when Heritage Bank employees (who work in the same office building as SB Capital) informed Feathers of the order to freeze his account, he then asked the bank to issue him a check and it did so.

Suzanne Ziermann, senior vice president at Heritage Bank, said the bank respectfully disagrees with the receiver’s account of that check, and that the bank is working to correct the report. She declined to provide more detail.

In a letter to investors last week, Feathers said he requested the funds from a business account he did not know was frozen, because “most of my net worth is tied up in the business and it was necessary for me to obtain enough liquidity for what I thought would be my family’s living needs for some period.”

Feathers wrote in an email that he and his family had to leave their Los Altos home temporarily out of fear for their security. His family has been drawn into the case in part because SB Capital had become something of a family venture. His wife, Natalie Taaffe, left her banking career to work for SB Capital 18 months ago. Feathers’ two 9-year-old sons and a caregiver were all on the payroll at SB Capital, a practice he described as “like many family-owned small businesses.” He said that after his wife took a significant pay cut to work for SB Capital, the company also paid for child care.

After discussing Feathers’ family assets, Seaman said he hadn’t identified any other people against whom to bring a lawsuit, but he mentioned the possibility of disgorgement, the forced return of ill-gotten profits.

In rare instances, such as the ongoing investigation into Madoff’s estate, a judge can rule that fictitious profits are liable to being seized from otherwise innocent investors.

Former SB Capital investors who cashed out, with seemingly legitimate accrued interest, might be on the hook for a “claw-back” of their gains, as might collaborators who profited from their work with SB Capital.

Although only Feathers and his wife have had their assets pursued by the receiver thus far, Seaman recommended exploring whether there were “third parties who aided Feathers in connection with this enterprise” and evaluating whether they should be liable for damages.

The SB Capital case as pursued by the SEC is a civil investigation, and thus penalties would relate largely to money. Criminal prosecution – that could result in a prison sentence – would have to be pursued independently by a state or federal attorney.

 

Transferring funds for profit

SB Capital investors placed their money in two funds, Investors Prime Fund and the SBC Portfolio Fund. Both touted returns of at least 7.5 percent, and one offered even higher returns, but with associated higher risk.

At the heart of the SEC complaint lies the allegation that SB Capital’s two funds transferred loans between themselves at least 17 times, allegedly generating $1.4 million in “additional management fees” for Feathers and other SB Capital employees in 2012.

Feathers doesn’t deny the transfers. Instead, he says they were a transparent part of the company’s business model and investors were consistently informed that the operating model for SB Capital paid fund managers through premiums.

“Each loan sold for a premium was accompanied by an economic analysis outlining the basis for the premium,” he wrote in an email. The transfers generated “sufficient revenues and income to the fund manager to continue operations, cover expenses, and provide a return on capital justifying the investment made into the company.”

The SEC also alleged that although investors were told 96-98 percent of proceeds would be reinvested as loans, instead more than 14 percent of the funds' combined assets were diverted into transfers to SB Capital. Seaman, the court-appointed receiver, reported at the July 10 hearing that SB Capital drew more than $6 million from its investment funds to pay the company’s operating expenses, including a nearly $500,000 payout to Feathers. That money was listed as “receivables” on the company’s balance sheets, that is, as money owed to the funds.

Whether the fund transfers and withdrawals were reasonable business practice, or instead activity that violated investors’ best interests and amounted to fraud, stand as the question to be hashed out in court.

 

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