$172 million loss

Discussion in 'Trading' started by flipside21, Jul 8, 2011.

  1. Former market wizard Gary Bielfeldt lost most of his trading gains he made over his lifetime in the late 1980s. This story shows it can happen even to the best of them.


    One Hand Giveth ..._ Tomas Kellner Robert Lenzner,_10.27.03_
    Too many trustees of tax-exempt foundations seem to have trouble keeping their hands out of the cookie jar. One reason: No one is watching.
    Do you need a fat tax break and have millions on hand? Here's a tip: Establish your own charitable foundation. If you need the money later, raid the foundation in the guise of drawing a salary as a trustee. It's perfectly legal, except for the most egregious, abusive cases. Now the problem is drawing attention from Congress, watchdog groups and prosecutors, especially in California and New York. As William Josephson, an assistant attorney general in New York, puts it: "The donors in these private foundations can't distinguish between their own money and the foundation's money."_ Take a look at Gary and Carlotta Bielfeldt of Peoria, Ill. Gary Bielfeldt hit it big in the bond market in the mid-1980s, trading as much as $145 billion in government bonds and making $42 million to $53 million a year, according to tax court documents. His trading prowess was cited in the 1989 book_Market Wizards, along with that of people like Bruce Kovner and Paul Tudor Jones._ In 1985 the Bielfeldts started the Bielfeldt Foundation to "benefit Peoria," endowing it with $30 million in cash. Through the year 2002 the Bielfeldts gave away a total of $24 million to Bradley University, a Peoria museum, zoo and other city projects._ No question some good was done, but it turns out the Bielfeldts also helped themselves to some of the goodies. An analysis of the foundation's tax records from 1985 to 2002 shows that Gary, Carlotta and their son, David, drew a total of $21 million in compensation from the foundation. All three are listed as foundation directors._ It appears the foundation pay coincided with troubles at Bielfeldt's trading business. For the first four years they managed the foundation's assets for free. However, in the late 1980s Gary's business soured.

    :confused: :confused: :confused:
    He incurred $172 million in capital losses, a tax court nixed his petition for an $85 million refund and the IRS slapped him with a $45 million bill in back taxes, a tax court ruling shows.

    Starting in 1990, Gary (and later, David) began charging for managing and trading the foundation's assets._ The fees could certainly not be considered a reward for good performance. Between the end of 1986 and the end of last year the $30 million endowment had shrunk to $13 million. Had the Bielfeldts put the $30 million into an S&P 500 fund and donated the same amount of money each year, the foundation would have $65 million in assets today. That includes paying the Bielfeldts $2 million in total management fees (at the 0.2% rate of Vanguard's S&P500 fund)._ All told, the family paid itself 81 cents for every dollar it gave away. The Bielfeldts probably won't pull the same trick again. Gary lost his tax appeals all the way to the U.S. Supreme Court and is now facing a $68 million tax lien._ Gary Bielfeldt did not return our repeated calls. Neither did his son or wife, who serves as the foundation's president, nor his lawyer. Although details of the matter were reported in September in the Peoria_Journal Star, the Illinois attorney general's office, which regulates charities, will not say if it has launched an investigation._ The Council on Foundations, which represents 2,000 charities with a combined $300 billion in assets, says a recent survey found that 75% of foundations do not pay their trustees. But the survey did not ask about other types of trustee fees, and regulators say that the Bielfeldt matter isn't unique among foundations. Trustees, says Josephson, the New York prosecutor, "are using substantial amounts of money to enrich themselves."_ The purpose of a private, or family, foundation is to do good by funding charitable purposes, such as soup kitchens or art museums. (A public foundation solicits money from the public.) Foundations have to distribute 5% of assets every year to keep their tax-free status. That figure includes administrative expenses required to run the foundation. The larger foundations usually have professional managers, but all are required to have a board of directors, also called trustees. They are often corporate managers or family members who had endowed the foundation with a large sum of money and used the donation to reduce, say, a large estate-tax bill._ To prevent double-dipping, the Internal Revenue Service's tax code bars wealthy donors and family members from being paid for their work for the charity._ However, the revenue code has a big loophole. It allows payment to a trustee, provided it is "not excessive," for services that are considered "reasonable and necessary."_ What is "excessive" and what is "reasonable" is any lawyer's opinion, however. "The standards are highly subjective," says Ellen Dadisman, a vice president with the Council on Foundations._ The feds can impose a 5% excise tax on a self-dealing transaction. But it's rare that they do that. In 2002 there were some 120 audits of the nation's 61,800 foundations, according to Marcus Owens, former director of the Exempt Organizations Division at the IRS. It can also impose a 5% tax on "jeopardy investments" for failing to "exercise ordinary business care and prudence."_ By and large the IRSlets the foundations and trustees do what they want, says Pablo Eisenberg, senior fellow at Georgetown University's Public Policy Institute._ That leaves enforcement in the hands of state prosecutors. Matters aren't better there. The states lack money and people. Some 37 states have their own charities bureaus, with New York's the most robust. Yet Josephson's New York staff has only 19 lawyers and 5 accountants to comb through the 47,000 private charities registered with the state. He believes there could well be another 20,000 or so that just don't bother to register._ His attorneys are currently investigating 35 New York foundations with possibly greedy boards. A typical case: A couple serving as foundation directors who made unsecured, below-market loans to family members equal to half the charity's assets. Josephson is attempting to negotiate the matter and won't disclose details._ At the moment he is in court fighting Michel Roux, who made a fortune running liquor distributor Carillon Importers and selling Grand Marnier and Absolut Vodka in the United States. Roux, 63, a_Chevalier de la Légion d'Honneur, France's most distinguished honor, says he lives by his creed "doing well by doing good." Some of Carillon's profits endowed the Grand Marnier Foundation in 1984._ It turns out, though, that Roux and five other board members, including Jacques Marnier-Lapostolle, the grandson of Grand Marnier's founder, were the charity's greatest beneficiaries. In 1994 the directors pocketed $569,000 in pay for handing out $589,000 in grants._ Between 1990 and 1999, the six paid themselves $3.4 million for giving away $6.5 million in grants to such beneficiaries as Meals on Wheels and the Friends of the Israel Defense Forces. Their charity's assets atrophied to $5.7 million in 2001 (the latest filing) from $11.3 million in 1990._ Josephson's office began investigating in 2000 after it learned that the board owned a $200,000 apartment in Teaneck, N.J., near Roux's business office. "The directors repeatedly breached their fiduciary duties of care and loyalty to the Foundation, acting in their own interest at the expense of the Foundation's well-being," Josephson's lawyers charged in court papers. Roux's attorney declined comment._ Given New York's statute of limitations, Josephson won't be able to recover any compensation taken prior to 1996. The case is now in settlement talks. Josephson originally asked the New York Supreme Court to have the directors fired._ In 1999 the charities bureau brought a case against Frank W. Getman Sr., a director of the $11.7 million Dewar Foundation in Oneonta, N.Y. Getman had caused the Dewar Foundation, the legacy of an early IBM shareholder, to lend $1.5 million of the foundation's assets to Wheeler Springs Resorts--a risky startup venture in which Getman already had a personal interest--without disclosing the matter to the rest of the board. In 2002 Getman agreed to pay $500,000 to the foundation, resign as an officer and director, and cover $135,000 of his $235,000 in legal fees (the foundation paid the rest)._ Congress recently took a stab at the problem. The Charitable Giving Act of 2003, which the House passed inSeptember, raised the penalty on self-dealing from 5% to 25%, nixed first-class and business-class air travel and banned wealthy donors and family members from including more than $100,000 in administrative expenses as part of the required 5% charitable distribution. Problem is, the Secretary of the Treasury still has to define what "administrative expense" means. It looks like the charity game will go on for some time._
  2. Another Wizard's magic deserts him.
  3. I surmise that Gary was whipsawed badly by the choppy Bond market of the late 1980s and early 1990s.

    Ditto for Jesse Livermore from late 1929 to 1932 bottom. Massive whipsaws without historical precedent. Yes, market can behave in ways not seen in historical data sets.
  4. This article is dated year 2003.