Value Microcaps Motherboard

[jtomm]

"Remember ACLN" is my "Remember the Alamo" phrase.

That fraud was constructed almost totally to lure in value investors. Cash in the bank, no debt, great growth, low p/e, etc., -- all fake. Even had the endorsement of JP Morgan at one time.

I found it very early on. Then Motley Fool picked it up. Then JP Morgan. Started on the Naz and went to the NYSE. Surely JP Morgan and/or the NYSE has checked everything out, right?

It's also a perfect example of why things should simply look right, rather than constantly need an "explanation" from management. Because a crook can come up with endless "explanations." It's not really that hard.

I owned it and actually made about a triple on it. But only by luck. I should have lost my shirt. The only reason I got out was that after the Sep 11 bombings I thought there might be real tensions and backlash in Nigeria which has a large Muslim population. Shortly after I got out is when Herb Greenberg and short sellers picked it up and started pointing out the things I already knew, but chose to make excuses for.

I was aware of all the red flags. A lot of little things were obvious. A lot. And I knew them all . . . but just wanted to believe.

Just a few examples.

Before they claimed to own any ships, ACLN claimed to just be renting space on empty carrier ships to ship their vehicles. But on their very own website they had a picture of a ship in port with the letters ACLN painted on the side. It was a small thing that I doubt many people even noticed. Oddly, I made excuses for the company in my own head. "Well, maybe it's just something the web designer did," or "maybe they're just trying to show that their cars are on that ship," etc. But think about it. If you were an honest guy running a company, you would never photoshop your company name onto a ship under any circumstances. But rather than look at the obvious, I made excuses for them. Never again.

Same thing about them claiming to have two CFOs at the same time. A totally preposterous notion. But at the time, they explained it as one guy handled things in Europe and the other guy here in the states just sort of needed that title for capital-raising purposes to be able to meet with the right people as they were in the process of buying ships and making some big agreements, etc. If you wanted to believe, it sounded plausible. But if you were not emotionally tied to it and looked at it objectively, it's complete nonsense.

And that "second CFO" is also a good example of why to be suspicious of people who omit things from their resume. It's usually on purpose to hide the bad stuff. Motley Fool had a follow-up on this guy who is now CEO and Pres. of an accountancy corporation, believe it or not:

http://www.fool.com/news/commentary/2004/commentary040204bm.htm?source=EDNWFT

What I already knew, but what ACLN really pounded into my brain, is that getting "explanations" from the company is NOT due diligence. It's a circle. A circle where they are always your sole source of information. If I say I'm the King of Spain and the only thing you ever do to verify that is to talk to me some more . . . well . . .

I knew about the screwy relationship with the "auditor" who was clearly not at arm's length. The company explained it away. "Probably no big deal," I told myself. Even though I knew it was.

-In a Monaco newspaper I'd found a bankruptcy filing for a previous company that was run by the same heads of ACLN. It had never been disclosed.

Common of many frauds, ACLN claimed to be doing business in a far away place, so there's almost no communications or ways to verify things. They claimed their sales agents were independent guys who might hang out at a local petrol station and that's just how things were done in Nigeria. A lot of this was word of mouth, literally, and not someone you could call, plus many of them were in a part of Nigeria that didn't speak English, etc.

In other words, "you can't verify anything independently, but it's okay."

-I remember I even contacted Hyundai Merchant Marine (HMM), who ACLN claimed was one of their main shippers. Found the guy handling ACLN's account. Asked what he thought of ACLN. He said they seemed to know a lot about cars and shipping, but they were very disorganized and didn't keep their word on a lot of what they said and he would not do business with them.

What did I do? Did that stop me? Heck no. I made excuses for the company. "Well, that guy at HMM probably just had an argument with someone at ACLN. It's probably a personality conflict."

When you "get religious" about a stock rather than just looking at the facts, you end up coming up with better excuses/explanations than the fraudsters themselves! No kidding. When management always has an explanation for things, pretty soon you just start making up the explanations yourself and don't even bother calling management. The process happens subtly and you don't even notice yourself doing it.

ACLN is also a good example that frauds are usually doing at least SOME business. A fraud usually isn't two guys with horns coming out of their heads sitting in an empty room with nothing but a telephone and signs on their forehead that say, "I'm a crook." Frauds usually will be conducting some business, have products to show you, etc. Things to reassure you. The operators will be smooth and polished. Nice presentations. They're called "confidence men" for a reason.

-I had plenty of suspicions about ACLN right from the outset. I asked all the right questions and did all the due diligence. But ultimately I let others reassure me, and when they did not, I simply made excuses for the company.

I remember talking to Scott Hood of First Wilshire Securities, who was a big investor in ACLN. This was very early on, before any negative reports started surfacing and even before Motley Fool had gotten into the stock. Mr. Hood was very smug because he had visited ACLN in Europe. They showed him a parking lot full of cars, showed him around a little. I raised some of the more serious issues with him. He told me I was being paranoid, that investing required one to have conviction and not be doubting oneself when all the numbers about a great company were there, blah, blah, blah. Basically, he sort of chewed me out rather than addressing the issues. He's Mr. Big Institutional Investor, he must know what he's doing, right?

Bottom line, never make excuses for a company on their behalf. When someone presents new facts, don't go into "defend the company" mode simply because you own the stock.

Things should simply look right, and be right, from the outset. No screwy arrangements. No need to call management to get the "real" story, even though the filings and the facts say something else.