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.

By June, Advanta came up with a Hail Mary scheme to retain cash. It shut off credit to around one million customers so it could stop paying out money, and jacked up interest rates on outstanding balances, in some cases from 7 percent to more than 30 percent. Regulators' phones rang off the hook with calls from small-business cardholders.

To their credit, officials at the Federal Deposit Insurance Corporation moved swiftly, and forced Advanta to pay back $35 million to cardholders. The agency also told Advanta to create a plan to operate its bank without FDIC deposit insurance — meaning the company would surely lose hundreds of millions of dollars in deposits.

By July, Advanta seemed on pace to run out of money within a year. Its solution, apparently, has been the "investment notes" offer. So far it has sold $183 million worth of these notes. By Newsom's calculations, the company's only chance at paying back this money would be to borrow more money. In his mind, the only people likely to give Advanta money in its current state are gullible investors.

Ponzi scheme "is a title that applies here," said William K. Black, associate professor of economics and law at the University of Missouri and author of the book The Best Way to Rob a Bank Is to Own One. He came to this conclusion after comparing the Chronicle ad with the details of Advanta's offer.

"The only way you can do this is like a Ponzi, and grow extremely rapidly," he said. "Even using these kinds of ads, and seeking out people who they perceive as the ultimate suckers in the marketplace, you're not going to be able to grow rapidly enough to stay alive all that long."


Why did FDIC officials act quickly in ordering Advanta to stop cheating its credit card customers, yet overlook the far larger investment note scheme?

The FDIC does not directly regulate sales of corporate debt — that's the job of the Securities Exchange Commission. But if, in the process of reviewing Advanta's activities, an FDIC bank examiner came to believe that the company's "investment notes" prospectus was intended to mislead investors, she merely would have needed to call the SEC.

Kenneth E. Scott, an emeritus Stanford law professor who specializes in corporate finance reform, had not been familiar with the specific Advanta case. But he said it's commonplace for bank examiners who detect signs of trouble to make referrals to other agencies, such as the SEC or the Department of Justice.

"If they [Advanta] got a prospectus approved six months ago, and there were all kinds of developments that made the continuing use of that prospectus materially misleading, that's an enforcement action the SEC could bring," he said. "Could the bank's supervisor call it to their attention? Certainly. Would the bank's supervisor know about it? I can't see how they couldn't."

To Newsom's mind, the delayed action by federal regulators may end up devastating unsophisticated investors who responded to Advanta's pitch. "You ask yourself, how would you feel if your mother had bought some of these notes off that prospectus on Friday, and then Monday afternoon the company owns up to its desperate condition?" he said. "This happened literally under the noses of the FDIC."

Despite the postcollapse talk of the government protecting consumers, caveat emptor still applies — even to newspaper readers looking for a safe place for savings.

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