Kit Menkin’s Leasing News

www.leasingnews.org  Monday, March 25, 2002

Headlines--- 

  PinnFund founder admits guilt, agrees to aid probe

  New Tax Law—NAELB April  4 at 12:00PM EST

    Why Bond Guru Decided To Attack GE's Practices

        Jim Lahti re-Opens Affiliated Corporate Services

            Monday—Odds and Ends

   Stream Sales Tax Project---Dennis Brown, ELA

                  February Housing Report with Economic Report

               Leasing Industry Future Council Report

###  Denotes press release

PinnFund founder admits guilt, agrees to aid probe

By Mike Freeman
San Diego Tribune Union Staff Writer

( He has covered this story from the very beginning. Editor)

PinnFund USA founder Michael J. Fanghella, ringleader in a seven-year scam that bilked investors out of millions, pleaded guilty late Friday to federal fraud and tax-evasion charges.

In a plea bargain with prosecutors, Fanghella agreed to help authorities pin down "every person" involved in the $330 million Ponzi scheme – one of the

PinnFund founder admits guilt, agrees to aid probe largest of its kind in Southern California.

"We're not stopping here," said Patrick O'Toole, U.S. attorney for San Diego. "The investigation is ongoing."

Under the agreement, Fanghella faces 11 to 14 years in prison, said Assistant U.S. Attorney Kevin Kelly. But his sentence may be reduced, based on how much information he provides to investigators.

Fanghella also was ordered to pay $159 million in restitution to investors, the amount prosecutors believe was stolen out of the $330 million that flowed into PinnFund. The rest was returned to investors in the form of monthly interest payments, prosecutors say.

But the 160 investors who put money into the scheme say they lost much more. Many are retired lawyers, accountants and real-estate developers. They worked closely with the SEC, doing financial legwork to uncover where the money went. Consequently, they think their losses are closer to $250 million.

Fanghella's plea comes one year and one day after the U.S. Securities and Exchange Commission unmasked the fraud in a sweeping civil lawsuit that shut down PinnFund, a Carlsbad company that specialized in mortgages for borrowers with poor credit ( and had equipment leasing offices throughout the United States ).

Authorities said millions in investor money, which was supposed to fund mortgages, went to fund Fanghella's lifestyle. Among the bills: A $120,000 New Year's party for about 15 people at a New York restaurant, and gifts to his one-time girlfriend, former porn star Kelly Cook. The gifts included a $350,000 promise ring, a Jaguar and BMW, and a $5 million house in Laguna Niguel.

The SEC won a $109 million judgment against Fanghella last year. It also forced Cook to return the bulk of her gifts, and settled with PinnFund's key money raiser, Oakland lawyer James Hillman.

Fanghella disappeared after the SEC action. On Aug. 1, after the SEC froze his bank accounts, Fanghella turned himself in. He was indicted on 20 criminal charges and has been behind bars since.

Dressed in a beige prison jumpsuit, Fanghella, 50, entered guilty pleas to conspiracy to commit wire fraud, conspiracy to commit money laundering, three counts of tax evasion and one count of filing a false report with a department of the United States.

As U.S. District Judge Marilyn Huff asked him questions about the plea agreement, Fanghella stood with his hands behind his back and answered in a strong, raspy voice.

Few things in this scam are small. On the tax-evasion charges, for example, Fanghella took $14 million in income from 1996-98 – years in which he failed to file income tax returns. So his back taxes for those years totals $5.56 million.

"It is an incredibly large income tax-evasion case," said Denise Rubin, criminal investigation special agent in charge with the Internal Revenue Service in San Diego. "Not that many people earn the kind of money that he's admitted not paying taxes on."

Fanghella's lawyer, Ezekiel Cortez, declined to comment after the sentencing and didn't return phone calls. Fanghella remains behind bars.

Kelly, the assistant U.S. attorney, said prosecutors and Cortez had been working on the deal for months.

"I think it's fair to say from Mr. Fanghella's demeanor in court that he wanted to accept responsibility for his conduct," Kelly said.

Sentencing is scheduled for mid-August. Until then, Fanghella is expected to help prosecutors.

"As everyone knows, you don't operate a Ponzi scheme by yourself," said Charles La Bella, a former U.S. attorney who has been appointed to unearth PinnFund assets. "You need other people involved. There were a lot of moving parts in this one, and Michael may be able to share an insider's view of how it worked."

Bilked investors welcomed news of the plea bargain. Along with La Bella, they're working up lawsuits against auditors, banks and others for failure to detect the scam.

"The theory has been as soon as he cut a deal, he would provide information that would bolster our civil claims," said a Bay Area investor, who wished to remain unnamed to protect his business reputation. He lost $2 million personally and persuaded friends to invest $25 million, which also was lost.

PinnFund is bankrupt. La Bella has recovered about $9 million, including a $1 million yacht, the $5 million Kelly Cook house and other assets.

La Bella also has filed other lawsuits, which include seeking $5 million from former PinnFund President Keith Grubba and $6.7 million from Tommy Larsen, former president of PinnFund's office equipment leasing subsidiary, PinnLease.

To this point, only Fanghella has faced criminal charges. But sources familiar with the case say Hillman, the money raiser, could be a target.

Hillman cut a deal with the SEC in which he turned over $17 million in cash. He also is selling assets and seeking tax refunds that could bring in $30 million. But his deal with the SEC doesn't shield him from criminal prosecution.

Authorities won't name other possible targets. "We're involved in the investigation, which involves potential tax charges on other subjects," said Rubin, the IRS special agent.

Mike Freeman: (760) 476-8209; mike.freeman@uniontrib.com

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New Tax Law—National Association of Equipment Leasing Association

EAEL is hosting a teleconference April  4 at 12:00PM EST on "Job Creation and

Workers' Assistance Act of 2002, and its affect on the Equipment Leasing". 

Jeffrey Taylor of ExecutiveCaliber, the Presenter, will discuss "What is in

the Law and What Didn't Make It",

 "Details and Implications of Changes in  MACRS and Net Operating Losses with Carry-Back Provisions",

"How the Law Impacts Pricing; and Lease vs. Buy Analysis" and "How the Law Impacts Estimated  Taxes for the First Quarter of 2002".

 If you need any additional information  please contact Alison Pryor at the EAEL, 914-381-5830.

Thanks--Alison

Amfnyc@aol.com

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Why Bond Guru Decided To Attack GE's Practices
 

By Gregory Zuckerman and Rachel Emma Silverman, Wall Street Journal

What set off Bill Gross?

Gross, the behemoth of the bond market, abandoned his usual low-key style and ripped into General Electric, accusing the world's largest company of misleading its investors, overloading on short-term debt and massaging its earnings without telling investors. The critique has sent GE shares tumbling, including a drop of 3.5% Thursday (3/21/02), which followed a 3% decline on Wednesday (3/20/02), for the worst two-day decline for the company since December.

But while the scrap surprised Wall Street - and sent GE supporters scrambling to defend the company - it capped weeks of frustration for Gross, the bond manager at Pacific Investment Management Co., the biggest bond-market player in the world.

In an interview, Gross said he has grown increasingly concerned as he has watched the drumbeat of recent news about companies and their accounting tactics. That ire finally boiled over earlier this week, when, in Gross's view, GE misled bond investors, costing them millions of dollars in losses.

It was then that Gross says he decided to make an example of GE. "I chose GE as the lightning rod," he says. "They're not the only ones, but there's real suspicion about them."

For months, analysts, Congress and frustrated shareholders have been assailing aggressive accounting used by many U.S. companies - accounting techniques that often have boosted earnings and propped up stock prices that otherwise may have fallen. Meanwhile, the debt levels at many companies have gone up in recent years, alarming other investors.

That combination, says Gross, could hurt earnings later this year if the economy, as he predicts, abruptly slows, making it hard for many of these companies to service that debt.

In response to investors' questions following Gross's spotlighting GE's reliance on short-term commercial paper, GE Chief Financial Officer Keith Sherin released a statement saying that because so much of GE Capital's growth came during the fourth quarter, "GE Capital entered 2002 with a high proportion of commercial paper in its debt structure."

Sherin said GE Capital is "in the process" of increasing its bank lines to $50 billion, from $33.5 billion, in an effort to reassure investors that it has ample access to cash.

While broad concerns about accounting and corporate debt have been known for months, Gross became one of the first major investors to act publicly on his concerns, selling about $1 billion of GE's commercial paper.

In the past year, Gross has been increasingly suspicious of GE and how the company has managed to just barely beat earnings expectations for many quarters. "What you keep hearing behind the scenes is they're selling corporate securities to book profits" before each quarter ends, Gross claims. "Everyone on Wall Street knows GE plays games; it's totally legal but just another example of how companies aren't coming clean with investors." Gross acknowledges that he has no evidence to back up his claim about the sale of securities to increase earnings. A GE spokesman declined to comment.

What finally triggered his response, Gross says, was a Wall Street Journal story on March 14 (See article). In the story, about a record $11 billion bond sale by GE's GE Capital unit, a company spokeswoman was quoted as saying the company sold the bonds because "absolute yield levels are at historic lows, and investor demand for long-term debt from high quality issuers is strong."

But while GE's bond yields were low compared with recent history, they weren't at historic lows, and indeed had been recently rising. In Gross's eyes, the real reason behind the sale was that GE Capital was unable to turn to the struggling market for commercial paper, or short-term IOUs, and was forced to sell the long-term bonds with higher yields, to raise cash.

The comment "got under my skin," says Gross.

For its part, GE said its statement was meant to convey that the company was selling at a low rate - not the lowest in its history. The company also gave additional reasons for the bond sale.

In the report released on Wednesday, Gross discussed how companies increasingly use aggressive accounting techniques, such as emphasizing "pro forma earnings," which often exclude a wide range of ordinary business expenses. But he focused the report on GE, suggesting that the company hasn't been upfront about how it uses acquisitions financed by stock and cash to boost its earnings, or about how it relies on short-term financing without having adequate backup credit lines, in his view.

After the report was written over the weekend, he said he grew even more peeved at GE earlier this week, when the company announced that its financing unit might sell an additional $50 billion of bonds or other securities. That raised the prospect of additional bonds swamping investors who had just purchased $11 billion of bonds.

The price of GE Capital's bonds immediately fell, hurting investors who bought the bonds in the $11 billion sale. "This was another example of how companies trample on investors," says Gross. "Executives care more about their options than their balance sheets."

Thursday, GE said the $50 billion "shelf" registration gives GE Capital "the capacity and flexibility to issue additional long-term debt as $31 billion of existing long-term debt matures through the rest of the year and as market conditions and growth warrant."

On Tuesday evening, Gross finished off the report, and it was posted on PIMCO's Web site the next morning. GE's stock and bond prices immediately began to fall.

An hour or so after trading began on Wednesday, Gross received a call from Dennis Dammerman, a vice chairman at GE. He was furious, Gross recalls, pointing out that GE doesn't generally use stock to make acquisitions, a point Gross now concedes.

But Dammerman failed to convince Gross that his larger points about GE's actions weren't justified. Soon, the executives were screaming at each other. "Why are you giving me such a hard time, I'm an investor in your company, for God's sake," Gross remembers telling Dammerman. "It was getting to be like a Fox News segment, where one person tries to outshoot the other. I said, 'Forget it.' " Then he hung up the phone.

Through a spokesman, Dammerman declined to comment.

In response to Gross's complaints about GE's reliance on short-term funding that isn't backed up with credit lines from banks, GE said that it hoped to reduce its short-term debt to between 25% and 35% of its debt total from 49% last year.

But now, some investors worry that GE's strategy to sell higher-cost long-term debt, rather than raise money in the troubled commercial-paper market, will hurt GE's bottom line. Moreover, some investors fear that others might follow Gross in abandoning GE's commercial paper, making it tougher for GE to tap that $1.4 trillion market. Recently, companies such as Tyco International have had to hunt down other sources of financing after being shut out of the commercial-paper market.

"I really just want GE to come clean, not to knock them down a notch," says Gross." We don't stand to benefit from this" squabble.

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Jim Lahti re-Opens Affiliated Corporate Services

#####  ##############################  ############ 

FOR IMMEDIATE RELEASE                                    CONTACT:     James R. Lahti 

Affiliated Corporate Services, Inc.

10804 Ridgeway, Suite 100

Jonestown, TX 78645

(512) 267-5445, Fax (512) 267-5443

Affiliated Corporate Services, Inc. (ACSI) Announces Re- Opening

Jim Lahti,  President of Affiliated Corporate Services, Inc (ACSI) announced today that ACSI is back in business as a broker funding source and has opened an office in Jonestown , TX.

"I have resigned from BancPartners of Texas in order to return to servicing the broker community which we have done for the last 17 years though ACSI.  Although my relationship with BancPartners remains strong and they have a unique business model serving community banks, I felt a need to go in a different direction and continue being a funding source for brokers.  We are committed to being "The Flexible Funding Source" as the "ACSI Advantage" and look forward to re-establishing the many relationships we've had for so many years"

Additional announcements will be forthcoming.

Monday---Odds and Ends

Wells Fargo 150 Year Celebration

Just a note from a Wells employee, we received 150 Options to buy Wells

stock, not 150 shares.  Big difference in my opinion.

 ( name with held )

( The original sender of the e-mail re-confirmed his original report.

“Nothing offered publicly to verify.  All I know is that a friend of mine

works as a paralegal for Wells and she was given 150 shares of stock two days

ago.  It was added to her profit sharing package she already had.”

 Perhaps some employees received the shares and other received the options.  We will try to find an accurate answer to this. editor )

____

Colonial Pacific Employees Return from Chicago Disappointed.

You may wish to investigate the latest GE / Colonial incident. There

were two people that accepted the transfer back to Chicago that came

back to Portland in the last several days. They threw their hands up and

said forget it because it was so overwhelming and a mess.

( name with held )

( Again, we have not been able to confirm or deny this report.  We communicated

with sender and received more  direct information, which confirms the report,

but we cannot divulge the information told to us as  it would identify the sender.

editor )

---

Houston—

Visiting Sue’s daughter and son-in-law in Houston, Texas: she is in residency

at Herman Hospital, part of the University of Texas, and he is an attorney,

working at a law firm while studying for the Texas Bar ( he is admitted at

the California bar.)  They live in River Oaks, a beautiful section of town,

ten minutes to work for each of them.  The azalea’s are in full bloom everyone.

Lights on at night in the houses, something you don’t see much in California.

The weather is great. Warm mornings and nights. The city beautiful in flowers with gorgeous tall trees and modern buildings, too.

Houston is the fourth largest city, following New York, L.A., Chicago...great restaurants.  They tell me people eat out 4.9 times a week. We enjoyed Papadeaux, Rottisserie for Beef and Bird (Chaine member and chef/proprietor,( Joe Mannke bought us an appetizer to start off, dessert with Port), Marks www.marks1658.com--the best, service, wine, food, another Chaine member,

and this was our favorite), we also went to, Churascos, Guadalajara’ visited Tea’s

Garden Center, more roses in one place than I have ever seen, and I am a collector; trees, plants, great prices, too; Center Market, a much larger wine collection than Draegers, even had Mondavi reserves, and I found 1999 Columbia River Le’Cole Merlot No.41, 3,500 cases made, Wine Spectator gave it a 91. Draegers had it for $45 and they were sold out.  He it was $28.50 and

10% off a case. Great selection of New Zealand wine.  Over 50 olives to choose as much as you needed, coffee beat-three types of Kona, spices ( Sue found the ones Bobby Flay talks about and bought some to take home, more than 50 types of apples, great prices, and people in the aisle that helped you.  And drive-up for food and deli.  The banks have multi-drive up, as it appears very popular.  Here in River Oaks they don’t have “speed bumps” but “road humps.”  What a great place to live. People were gracious, very friendly, what a wonderful city.

Yes, saw the Enron building and the Houston Astro Superdome ( not doom ).

I’m tell you, California has fallen behind the times with what I have seen

seen in Texas.

Houston would be a great city for a leasing conference.

Kit Menkin, editor

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Stream Sales Tax Project---Dennis Brown, Equipment Leasing Association

I am circulating an amendment to the Lease Definition for any immediate response you wish to send me at dbrown@elamail.com

It seeks to clarify the exclusion of equipment provided with an operator.  The Leasing Subgroup of the Streamlined Sales Tax Project (SSTP or Project) decided to amend the definition to accommodate a Tennessee court decision that maintenance provided to periodically empty the tank of a rented Porta Potty constituted an operator being provided with the lease.

The definition of a lease provided below currently excludes "the provision of tangible personal property along with an operator for a fixed or indeterminate period of time."  The amendment seeks to explain the exclusion relates to an operator having a continuous presence necessary for the proper functioning of the equipment and that someone performing sporadic maintenance or inspection services is not an equipment operator. The Project intends to add the following two sentences to 1(c) of the lease definition.

"A condition of this exclusion is that the operator is necessary for the equipment to perform as designed. For the purposes of this subsection, an operator must do more than maintain, inspect, or set-up the tangible personal property."

Here is the current draft of the lease definition to which the amendment is being added.  Your comments regarding this revision can be sent to me at

 dbrown@elamail.com

DEFINITION OF LEASE OR RENTAL

To be inserted in Agreement, Section 312.  Definitions.

LEASE or RENTAL

Lease or rental means any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration. A lease or rental may include future options to purchase or extend.

1) Lease or rental does not include:

a.) A transfer of possession or control of property under a security agreement or deferred payment plan that requires the transfer

of title upon completion of the required payments;

b.) A transfer of possession or control of property under an agreement that requires the transfer of title upon completion of the required payments and payment of an option price that does not exceed the greater of $100 or 1% of the total required payments; or

c.) The provision of tangible personal property along with an operator for a fixed or indeterminate period of time.

2) Lease or rental does include: Agreements covering motor vehicles and trailers where the amount of consideration may be increased or decreased by reference

to the amount realized upon sale or disposition of the property as defined in 26 USC 7701(h)(1).

3) Characterization of Transaction for Other Purposes:

        The definition provided in this section shall be used for the purposes of this chapter regardless if a transaction is   characterized as a lease or rental under generally accepted accounting principles, the Internal Revenue Code, the [state

            commercial code], or other provisions of federal, state or local law.

Transition Rule:

This definition will be applied only prospectively from the date of adoption and will have no retroactive impact on existing leases or rentals.  The definition of lease in this section shall neither impact any existing sale-leaseback exemption or exclusion that a state may have, nor preclude a state from adopting a sale-leaseback exemption or exclusion after the effective date of this

agreement."

Dennis Brown

DBROWN@ELAMAIL.COM

February Housing Report with Economic Report

                                                                                                     File code:    1620

                                                                                                     Date:     March 22, 2002.

TO: Distribution

From: Al Schuler

Subject: U.S. Housing Starts – February  2002

The good times keep rolling on - housing starts rose 2.8% in February to a rate of 1.769 million (SAAR), the highest level in three years.   Single family activity increased a healthy 7.4%, to a SAAR rate of 1.752 million.     Permits, an indicator of future activity, were up 1.8% (1.752 million SAAR).  Single-family permits were up a very healthy 2.7%.  Regionally, the West led the way with a 14% increase while the Northeast was down 9.3%.  The South and Midwest were up about 1%.

Analysis and outlook:  Mild weather certainly helped, but housing fundamentals continue remain strong.  Mortgage rates, a key determinant, hovered around 7% in February; consumer confidence continues to strengthen; inflation at the retail (CPI) and wholesale level (PPI) is a non event; and solid appreciation in house values is encouraging homeowners to trade up on their equity gains.   Some problems remain: business investment will be slow to reverse course until corporate profits improve; unemployment was a problem, however, it is now receding. The main concern will be the speed of the recovery – if too rapid, the Fed will have to aggressively raise rates, and that will slow housing in the 2^nd half.  Inflation will increase as the economy improves and rising oil prices won’t help, although Mideast tensions/politics are the main factor with that issue.  Productivity improvements should help to keep inflation down however, as the economy strengthens throughout the rest of the year.      

Leasing Industry Future Council Report

Annually, some of the most influential executives of the equipment leasing industry gather to deliberate on the future of the industry and identify emerging issues. The Foundation sponsors the Industry Future Council (IFC) and distributes the IFC's valued annual report.

The Industry Future Council Report is one of the most requested and visible publications produced annually by the Equipment Leasing and Finance Foundation.

 Past reports have gained significant media coverage and are read and used by the industry's most influential executives all year long.

The IFC meeting is by invitation only and is held in January. For details on future meetings, contact Lisa A. Levine, Foundation Executive Director at 703-516-8363 or llevine@elamail.com.

Here is the 2002 Report:

http://www.leasefoundation.org/IFCReport/2002/2002IFCRpt.pdf

Thirty Trends  Now Affecting the Leasing Industry

http://www.leasefoundation.org/IFCReport/2002/30TrendsReportLeasing.pdf