One big thing to start: Wirecard executive Jan Marsalek, pictured below, touted secret documents about the use of a Russian chemical weapon in the UK, as he bragged of ties to intelligence services to ingratiate himself with London traders. The documents, reviewed by the Financial Times, included the formula for novichok, the world’s deadliest nerve agent. Go deeper with our latest exclusive on Wirecard here.
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Capital markets, the Mafia and the Calabrian health system
Some of the most entertaining scenes from the hit HBO TV show The Sopranos include the protagonist, mafia boss Tony Soprano, trying to hide huge amounts of illegal cash.
He uses the bird feeder, stashes money under concrete and eventually becomes acquainted with offshore accounts.
But even the creators of perhaps the most popular television show ever would’ve struggled to come up with this storyline: crime proceeds from Italy’s most powerful mafia have been flowing through the global financial system into investment portfolios of private banks and hedge funds via the bond market.
This is a story about how money looted from hospitals in one of Italy’s poorest regions has ended up being routed through the City of London, Luxembourg and Milan in financial instruments that are typically favoured by hedge funds and investment banks.
Proceeds from front companies owned by the Calabrian ’Ndrangheta mafia were unknowingly bundled up by intermediaries and mixed with other assets into debt products that were then sold to investors, ranging from Italian private banks to a pension fund in South Korea. We’re talking about hundreds of millions of euros of these bonds.
So what business are we talking about? The leading families of the ’Ndrangheta control a large part of cocaine importation into Europe, as well as arms smuggling, extortion and cross-border money laundering. But the money in this instance is predominantly coming from plundering Italy’s public health system.
The diagram below helps to explain exactly how this worked. Essentially, middle men were buying up unpaid invoices from supplies at a steep discount. This is pretty common practice now (there are even online auction sites) for investors who want to get that extra yield. In this case it was a good deal because the invoices were, in effect, guaranteed by the Italian state.
Specialist financial companies then bought the invoices and merged them with pools of various other assets which were packaged into bonds backed by unpaid bills and sold to unwitting investors.
This goes beyond the stereotypical rural mafia families we’re used to hearing about. These are financially sophisticated and powerful criminal organisations.
In the region of Calabria they have a monopoly on almost every organ of the Italian healthcare system — from funeral homes to ambulance services and the transportation of blood. The ’Ndrangheta clans even know that people have died before their families do.
To be clear, the legitimate financial companies that bought the invoices didn’t know at the time they were connected with organised crime, and when they found out after anti-mafia raids they reported it to the Italian authorities.
The amount of bad invoices made up a small amount of the total that entered into these deals and the companies themselves haven’t been accused of any wrongdoing.
The FT’s Miles Johnson followed the trail of money from Calabria all the way to European financial institutions in Milan and London. Make sure you read this unmissable story on what he found.
Newsflash: hedge funds don’t like easy money
To run a successful long/short equity hedge fund, you’ve got to be good at two things: picking stocks that will go up and picking stocks that will go down.
OK, there is more to it than that, but that’s lesson 101. As a seasoned investor, you should theoretically be pretty good at picking stocks that will go up. But shorting is another beast altogether.
Short-sellers tend to go through a lot of pain before they get to the other side. Look no further than the small cohort of hedge funds managers who have shorted Tesla.
It’s not just about finding a company that they believe is overvalued, or perhaps a fraud. They have to convince the rest of the market that what they’re saying is true. Not to mention that losses can theoretically be limitless.
Just to use Tesla as an example: its stock price is trading at $1,394. Many short-sellers started betting against the electric carmaker when it was $200 or so.
As a result, l/s equity funds, one of the most popular strategies in the hedge fund universe, have run into some trouble. Finding companies to short in the longest bull market ever has been difficult.
The underperformance of the short book has dragged down results from the long book and many investors in these hedge funds have found themselves asking: why bother?
There are companies out there that have provided a windfall for short-sellers, Wirecard among them.
But many l/s hedge funds would argue that quantitative easing has fuelled a misallocation of capital to poorer-quality companies, or put simply, there’s too much cheap debt.
The latest to feel the pain is Lansdowne Partners, which this week decided to shut its flagship hedge fund.
The move by the Mayfair-based fund marks a big retreat by an industry pioneer. It also shows how difficult the unstoppable bull run has made life for these groups.
More here from the FT’s Laurence Fletcher.
An expensive night at the museum
There is plenty of weirdness at the annual Met Gala in New York where celebs seemingly compete for the most bizarre outfit (in 2019, Katy Perry dressed as a chandelier and Jared Leto brought a replica of his severed head).
But for Mark Watson III it was, apparently, a place to do business. Watson was the longtime chief executive of Argo Group, a listed $2bn property and casualty insurer, and he attended the soirée with his wife in 2018 and 2019. And as it happened, Argo paid more than $100k over those two years for the tickets believing the charity and the mingling made it worth spending shareholder money.
We know about this expenditure because Argo published the findings of a remarkable internal investigation this past March over perquisite expenses for Watson, who left the company under pressure late last year.
The company accounted for $3m worth of previously undisclosed perks that Watson was given between 2017 and 2019 that included private jet flights, pricey furniture and Upper East Side museum parties.
The Securities and Exchange Commission announced last month that it would settle with Argo over faulty disclosures of executive compensation for almost $1m. And as Sujeet Indap explains this week in On Wall Street, companies face a constant dilemma deciding between whether an expenditure for a top executive counts as a perk that needs to be disclosed or a simple business expense that gets buried in a line item.
Mike Whitman left the private equity group General Atlantic in June, just months after joining, Bloomberg News reports, after executives from his former employer Blackstone complained about what they saw as a workaround to the restriction on Tripp Smith — another former Blackstone employee — poaching ex-colleagues.
Kirkland & Ellis has added to its Cfius and national security practice following the hiring of Ivan Schlager from Skadden Arps. It has hired Daniel Gerkin and Nathan Mitchell as partners. Michelle Weinbaum joins as an associate. They all come from Skadden.
Guillaume Pepy, former chairman and chief executive of the French rail company SNCF, has joined the Canada Pension Plan Investment Board as a senior adviser on European investments.
Apollo Global Management has hired Dan Zarkowsky as a partner in its credit business. Zarkowsky joins from Goldman Sachs and will work on Apollo’s new direct lending push.
Simon Marrison, chairman of LaSalle Investment Management’s European business, will retire from the role in July and join KKR as a senior adviser on real estate investments in Europe in September.
Coty has appointed Princess Anna of Bavaria, a journalist and author known as Anna von Bayern, as chief corporate affairs officer.
Bankruptcy tracker More than 110 companies have declared bankruptcy this year in the US and blamed the coronavirus pandemic for their troubles, according to a list compiled from court records, statements and interviews. It’s not just retailers and restaurants: the list includes a cannabis company, a rehab-centre operator and a church hit by allegations of sexual abuse. (BBG)
The Robinhood effect Drawn in by a Silicon Valley playbook of nudges and push notifications, the users of the trading app Robinhood trade the riskiest products at the fastest pace. (NYT)
Pandemic-proofing Can the risk of a global pandemic ever be insured? In the US, a split is emerging in the industry, as Chubb sets out a plan for a public-private partnership model. (FT)
Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt and Mark Vandevelde in New York, Miles Kruppa in San Francisco and Don Weinland in Beijing. Please send feedback to email@example.com
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