Wed05272015

News

LASD opens registration for online strategy sessions

As the Los Altos School District plans how to spend its $150 million in Measure N bond funds, its initial goal is to broaden community input.

Following an April 22 meeting, the district is casting a wider net in the hopes of soliciting feedback from...

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Schools

Students discuss academic, social pressure in CHAC forum

Students discuss academic, social pressure in CHAC forum


Traci Newell/Town Crier
Community Health Awareness Council hosted a forum earlier this month where local students discussed the varied pressures they face.

Local students face enormous pressures in their lives, ranging from academic to social, but s...

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Community

Alan Alda discusses career, family and science at the Celebrity Forum

Alan Alda discusses career, family and science at the Celebrity Forum


Alda

Those who laughed along with Hawkeye Pierce on the long-running TV program “M*A*S*H*” would have enjoyed the recent Foothill College Celebrity Forum Speakers Series featuring actor Alan Alda.

Alda appeared May 13-15 at the Flint Center for...

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Sports

Eagles, Spartans advance

Eagles, Spartans advance


Town Crier file photo
Los Altos High’s Lizzy Beutter registered three hits in last week’s playoff win over Watsonville. She was also the winning pitcher.

Led by Lizzy Beutter, host Los Altos High whipped Watsonville 9-0 in the opening ro...

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Comment

Giving the thumb to what's done: Editorial

In the wake of recent Los Altos-area news events, we’re all thumbs.

Thumbs-down: To the Los Altos City Council’s decision to put the Walter Singer bust in storage. This is wrong on so many levels – even worse than the initial council decision to tra...

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Special Sections

Planting is possible despite drought

Planting is possible despite drought


Tanya Kucak/Special to the Town Crier
Wash the soilless mix off the root ball into the same container in which you have placed the clay soil from the planting hole. Remove at least an inch from the top and sides of the plant.

In this continuing dro...

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Business

Los Altos-based startup eyes digital makeup color-matching

Los Altos-based startup eyes digital makeup color-matching


Alicia Castro/Town Crier
Kokko Inc. Makeup Director Meli Pennington, standing, tests different shades of foundation on Los Altos resident Karen Melchior.

Meli Pennington knows cosmetics.

She has painted faces for the pages of Vogue and Glamour,...

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Books

Horan's 'Loving Frank' offers fictionalized account of famed architect's illicit affair

Horan's 'Loving Frank' offers fictionalized account of famed architect's illicit affair


In the 1920s, two married people fall in love, leave their spouses and children and set about living and traveling together. Affairs of this sort were considered shocking at the time. But the scandal was heightened given that the man was Frank Lloy...

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People

GUY WILSON SHOUP

Guy Wilson Shoup, 80, died on April 28, 2015, at his Palo Alto apartment, after a long period of ill health. Born on November 22, 1934, to Margaret Owen Shoup and to Jack Wilson Shoup (the second son of Paul Shoup, widely considered the founder of Lo...

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Travel

Flying south for the winter: Antarctica trips are not just for the birds

Flying south for the winter: Antarctica trips are not just for the birds


Photos Courtesy of Dave Hadden
Los Altos residents Dave and Joan Hadden watched the scenery from the large boat and a smaller Zodiac.

Standing on the beach with hundreds of thousands of penguins is “the experience of a lifetime,” according to Ga...

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Stepping Out

LA Stage Co. goes to 'town'

LA Stage Co. goes to 'town'


courtesy of Los Altos Stage Company
The Los Altos Stage Company production of “Urinetown: The Musical” opens this weekend.

The Los Altos Stage Company caps its 19th season with the musical comedy “Urinetown: The Musical,” scheduled to preview Th...

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Spiritual Life

Mercifully in His grip: Exploring our true position in Christ

I recently read a wonderful analogy about our true position in Christ. It was shockingly contrary to the messages impressed upon me in church, but deeply rooted in the Bible. The analogy is that of child and a parent. If you have ever taken a small ...

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Magazine

Practice prudent pruning: Maintaining manzanita, ceanothus and toyon

Practice prudent pruning: Maintaining manzanita, ceanothus and toyon


tanya kucak/Special to the Town Crier
Shrub manzanitas are known for their sinuous mahogany trunks and branches. If the foliage hides the bark, prune selectively to open the center so that the bark is visible year-round. This Montara manzanita is ...

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Inside Mountain View

Wings of Freedom takes flight: Moffett Field ground zero for World War II experience

Wings of Freedom takes flight: Moffett Field ground zero for World War II experience


Megan V. Winslow/Town Crier
Passengers, above top, speak with B-25 pilot Syd Jones after their flight.

My assignment was to photograph and observe the B-25 Mitchell’s passengers, but as we bumped and dipped along the runway, I noticed my three c...

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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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