Tue11252014

News

LA council votes to delay community center update

LA council votes to delay community center update


Ellie Van Houtte/ Town Crier
The Los Altos City Council voted to delay adoption of a community center conceptual design plan last week. The plan includes elements from a design charette held earlier this fall, left.

The Los Altos City Council last...

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Schools

Scientists bring experiments into MV classrooms

Scientists bring experiments into MV classrooms


Ellie Van Houtte/Town Crier
During a Science is Learning geology lesson, Theuerkauf Elementary School students learn about igneous rocks by observing how sugar changes form when heated.

Hundreds of local elementary students perform experiments w...

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Community

Local actors star in PYT's 'Oklahoma!'

Local actors star in PYT's 'Oklahoma!'


Courtesy of Peninsula Youth Theatre
PYT’s “Oklahoma!” features, from left, David Peters of Mountain View, Jenna Levere of Los Altos and Kai Wessel of Mountain View.

Time is running out to catch Peninsula Youth Theatre’s production of “Oklahoma!”...

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Sports

Eagles advance

Eagles advance


Ellie Van Houtte/Town Crier
Los Altos High’s Carmen Annevelink, left, and Kristen Liu put up a block against Mountain View. Annevelink totaled 20 kills.

Mountain View High’s out-of-the-gate energy could last for only so long against rival and he...

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Comment

Coping with addictions: Haugh About That?

Preparing to deal with my lifelong addiction, I stood in front of the mirror ready to confess the shame I’d been hiding. The first step to healing, I reminded myself, is to admit something is wrong.

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Special Sections

NASA, Google agreement preserves Hangar One

NASA, Google agreement preserves Hangar One


Bruce Barton/Town Crier
Hangar One, pictured here last January, will be restored under an agreement between Google and NASA.

NASA and Google Inc. forged an agreement last week that allows Google to lease a portion of NASA’s historic Moffett Fede...

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Business

State Street science center closing Nov. 30

State Street science center closing Nov. 30


Ellie Van Houtte/
Helix at 316 State St. is closing after the completion of a one-year grant from Passerelle Investment Co. The science center became a popular destination because of its various exhibits. Town Crier

A popular downtown destination...

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Books

Children's author signs books at Linden Tree

Children's author signs books at Linden Tree


Author Tiffany Papageorge is scheduled to sign copies of new her book 11 a.m. Dec. 6 at Linden Tree Books, 265 State St., Los Altos.

Papageorge’s “My Yellow Balloon” (Minoan Moon, 2014) is a Mom’s Choice “Gold” winner. In the book, the Los Gat...

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People

JAMES WINDELL SMITH

JAMES WINDELL SMITH

January 11, 1939 – November 6, 2014
Resident of Mountain View

James Windell Smith, a 40 year resident of Los Altos, passed away from complications after a post-surgery stroke November 6th, 2014 in Los Gatos, California.

Born on January 11, 1939 on...

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Travel

Olive Sonoma: There's more to the quaint town than wine

Olive Sonoma: There's more to the quaint town than wine


Eren Göknar/ Special to the Town Crier
While many day-trippers may think that Sonoma is all about the grapes, the region boasts other delights. Try a biplane ride over the patchwork landscape.

Sonoma, a scenic two-hour drive from Los Altos, boa...

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Stepping Out

LA Stage Company opens 'Fairway'

The Los Altos Stage Company production of Ken Ludwig’s new comedy “The Fox on the Fairway” is slated to run Thursday through Dec. 14 at Bus Barn Theater, 97 Hillview Ave.

A tribute to the English farces of the 1930s and 1940s, “Fox” is a romp that p...

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Spiritual Life

Author of Jewish historical novel slated at Congregation Beth Am

Author of Jewish historical novel slated at Congregation Beth Am


The Beth Am Women have scheduled “A Conversation with Author Maggie Anton” 7:30 p.m. Nov. 20 at Congregation Beth Am, 26790 Arastradero Road, Los Altos Hills.

Anton, winner of the 2012 National Jewish Book Award for Fiction, will discu...

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Magazine

Christmas At Our House home tour celebrates 26 years

Christmas At Our House home tour celebrates 26 years


Courtesy of Christopher Stark
Homes on the St. Francis High School Women’s Club’s Christmas at Our House Holiday Home Tour showcase a variety of architectural styles.

The days grow short on sunshine but long on nostalgia as the holidays approach...

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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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