Haunted By Ghosts

By DAVID MOON, Moon Capital Management
July 10, 2005

Once again, Knoxvillians can be embarrassed (or proud, depending on your outlook) that one of our own has brought down the wrath of federal financial regulators on our scruffy little city. Just as the ghost of Cas Walker continues to influence generations of local elected officials, it seems that Jake and C.H. Butcher are destined to be the equivalent role models of a fringe financial element in our community.

I guess everyone needs role models, even the ethically challenged.

When the Securities and Exchange Commission sued Jon E. Hankins, alleging that he and his firm, Tenet Asset Management, had provided falsified records to clients, Mr. Hankins joined a list of infamous local financial folks to run afoul of the law. Hankins hasn't been convicted of anything. To my knowledge he's accused only of trying to hide terrible investment decisions, not of absconding with anyone's money. But I suspect that doesn't pacify many of his investors. They thought they were making more than 30 percent a year, when in fact they were losing more than 20 percent. Ouch!

Ten years ago Knoxville was rocked by a suicide that revealed a multimillion-dollar Ponzi scheme. In 2002 a Knoxville resident was convicted for his role in an Etowah scheme where he promised to triple investors' money every six months because he had developed a process to convert common ores into gold and platinum. Later that year a different group of Knoxvillians sued a group, alleging a Ponzi scheme disguised as an Internet retailer about to go public. Less than a year ago a couple in Morristown was arrested for perpetrating a financial fraud for eight years.

I don't know if our experience is typical of a community our size or if something in the mountain water just inspires it around here, but it seems we have more than our share of shenanigans going on.

There are some red flags you ought to look for when considering an investment that sounds too good to be true. The first red flag is that something sounds too good to be true, but you already knew that. If someone claims to be generating returns that are exorbitantly and consistently above those of managers with similar styles, their picture should be on the cover of Forbes. Greed and emotion often cause them to ignore their common sense.

Tenet Asset Management was not registered with the Securities and Exchange Commission as a Registered Investment Advisor. Not a good sign. Being regulated by the proper authorities does not preclude malfeasance. Not being regulated, however, should cause concern.

Don't be fooled by appearances. A fellow walking around in an $1,800 suit may have bought it yesterday on a credit card. Things are not always what they seem.

There are probably just as many sinners in church as there are at Shoney's. Be wary of people who sell investments on the basis of any emotional factor, including your religion.

My wife has great intuition. She can smell situations that aren't quite right. However, your intuition will not expose or detect a fraud if the crook does not have a conscience. A snake oil salesman is most dangerous when he really believes the snake oil works.

Respect your intuition, but not exclusively. God gave you a brain for a reason.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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