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Readers skimming the business section of the San Francisco Chronicle on Sunday, July 12, might have been surprised to see an extraordinary investment opportunity in a quarter-page advertisement running a couple of columns below Scott Adams' Dilbert cartoon.
"You can now earn: 1 year — 11.00%," the advertisement announced, urging readers to go to a Web site describing "investment notes" offered by Advanta Corp. The Utah-based company owns a bank that, despite all the Obama administration's talk of finance industry reform, had fallen through the cracks of financial regulation.
The investment offer seemed unbelievable, given that bank savings account interest rates nowadays top out at about 2 percent. (Indeed, First Republic Bank advertised that modest rate in another ad on the same page.)
"It looks kind of like a CD. It appeals to an older person trying to get a better rate," said Richard Newsom, a retired bank examiner who gained fame as one of the investigators who helped bring down 1980s savings and loan villain Charles Keating.
It turns out that the investment notes are a far worse deal than the Chronicle ad lets on, because buyers may have stood a relatively slim chance of ever recovering even their principal investment, let alone interest. In fact, soon after the ad ran, the Web site (www.advanta.com/notes) had been taken offline. (A message says the site is down for "maintenance.")
And on July 17, Advanta filed a statement with the Securities Exchange Commission, proposing a new prospectus for investment note buyers. It painted a picture of a company in mortal peril, quite different from the rosy description offered in the Chronicle.
"There can be no assurance that we will be able to develop and implement a new business plan and achieve profitable operations in the future," Advanta's revised statement read. In other words, it apparently plans to finally inform mom-and-pop savers lured by the Chronicle ad that they're being offered junk. But the revised prospectus came only after Advanta had sold at least $183 million in the type of debt offered in the "notes" advertisement.
One way or another, the ad and the apparently misleading offer accompanying it are examples of how, despite all the federal government hand-wringing about financial regulatory reform, the law of the jungle still prevails: "This is an example of the old standard rule, that if it looks too good to be true — run," Newsom said.
Newsom has spent much of July poring over publicly available financial filings regarding Advanta. He has determined that the offer was for corporate debt in a company that is unlikely to repay because it's on the verge of collapse. And he has become convinced that the Chronicle ad offer is the functional equivalent of a Ponzi scheme.
He isn't the only one questioning the offer. Mark Leyes, a spokesman at the California Department of Corporations, says his department's chief of enforcement is aware of the ad, and forwarded information about the Advanta "investment note" offer to the Securities Exchange Commission for a possible federal investigation.
The SEC's policy is to not comment on ongoing investigations, but a misleadingly optimistic online investment prospectus might be exhibit one. The prospectus described Advanta's situation before it began its spring-and-summer death spiral, suggesting to potential note buyers that their money would be safe. If there isn't an investigation, Leyes said, "this might be enough to start one."
Leyes, however, did caution against applying the label "Ponzi scheme" to an ongoing operation such as Advanta's. "Unless somebody has inside knowledge [that] that's their intention, it's hard to demonstrate that," he said.
Meanwhile, financial analysts have also been sounding alarms about Advanta's recent offer. In mid-July, Fitch Ratings predicted that the likelihood that investors would be paid back at all on their Advanta "investment note" — let alone earning 11 percent annual interest — was, at best, one in three. As a result, according to Fitch Ratings, the company is in "wind-down," or liquidation mode. And in April, even before it had become fully apparent that Advanta investment note buyers were likely to lose all their money, Dow Jones MarketWatch named the offer "Stupid Investment of the Week."
Advanta spokeswoman Amy Holderer declined to comment, other than to say the SEC was inquiring into the notes offer. "Basically, our note program has been in place over fifty years," she said, adding that it is "currently under registration review with the SEC."
A Chronicle spokesman said he would not comment on individual advertisers, but said that each advertiser signs a contract promising that all statements in its ads are true.
It's very unusual for high-risk investments to be advertised in a general-circulation newspaper such as the Chronicle, most of whose readers aren't specialists in analyzing the risk of corporate default.
Why would Advanta apparently attempt to lure unsophisticated San Francisco investors?
Advanta's dicey offer arose just as the company had become desperate for cash, thanks in part to moves by federal regulators to protect consumers.
Like other financial companies, Advanta was crushed under the global financial collapse. It used to make money by being one of the country's top suppliers of credit cards to small businesses. The company obtained money to loan to cardholders in two ways. It operated a federally insured savings bank, collecting some $1.5 billion from depositors seeking a safe, insured place to sock away money, and resold credit card IOUs to Wall Street investors in the form of bonds. But the 2008 credit collapse meant investors stopped buying the bonds. Struggling cardholders, meanwhile, began missing payments, making Advanta's pile of IOUs worth even less.