Monday, August 21, 2006

The Enigma of Martin Armstrong

Some memories fade, but are not forgotten. The same holds true for certain personalities, particularly the bizarrre and eccentric. One such notorious individual is Martin Armstrong a.k.a. Princeton Economics a.k.a. self-professed expert in the history of money and things gold, and of course, true to my theme of things Japanese. He was accused of Ponzi fraud and the purveyor of the notoriously unvaluable "Cresvale Bonds" that besotted Japanese corporate investors and populated their portfolios, much to their eventual chagrin. Coincidentally, in a bout of synchronicity, I was wondering only a few weeks ago what's become of him and was preparing a post, so it is timely indeed that after languishing for six and a half years in a Manhattan jail cell, he finally pleaded guilty to charges fo Fraud on Thursday, August 17th 2006.

In a nutshell, Martin Armstrong was a confidence trickster, if not a fraudster for which he was accused. Martin Armstrong was also a bad trader. A very very bad and inept trader. And Martin Armstrong committed fraud to cover up his bad trades. And then he committed more trades to cover up his fraud. Most in Nikkei and Gold. Despite the laughable ineptitude with which he implemented his "strategies", by most accounts he was smooth, suave and authoritative, in a way that encouraged people to entrust to him their money. Which he duly lost. Many many hundred of millions of US doillars. Perhaps billions. The official court dockets (available on-line) from his 1999 indictment in the Manhattan district of US Federal Court read like a Shakespearean comedy. The more he traded, the more he lost. So much and so bad were his trades that his colleagues, and brokers mercilessly joked about it behind his back. He was so consistently wrong-footed in his bets that he would have done far better flipping a coin to decide whether or not to be long or short. Or use the infamous "8-Ball" method. Or consult Nancy Reagan's financial astrologer, or ask the advice of Paul Wolfowitz. Anything but use his own judgement.

Though his company, Princeton Economics, had head offices in the US, he traded from Tokyo in an office overlooking the gardens of the Imperial Palace. For Japan has a special place in his scheme. You see, the Japanese too, in undertaking their own form of speculation known as Zaitech, had lost billions in late 80's and early 90's on dubiously-thought-out wrong-footed speculation and investment. Like Martin Armstrong, and other agent-trader victims shell-shocked by large lossess, they were too ashamed and emabrassed to tell their shareholders that they had punted wrongly, or in UK football vernacular, scored an "own-goal". Not willing to "come clean, they found themselves with a serious problem and yearned for a clever and tidy solution that would absolve them of the thing they feared most, which was NOT the losing of the money itself, but accepting responsibility, a dilemma not unlike that faced by I. Lewis "Scooter" Libby.

Enter Martin Armstrong and the almost forgotten Cresvale Securities. He too had a problem since his golden-tongued investment plans, proved rather less robust than hoped [and promised] and resulted in large trading losses for his clients. It seems that he was able to continue his scheme and make payments to the clients who redeemed by using the proceeds from new investors. This, however was proving more difficult as losses mounted, and so he need new clients. Big clients. Well-heeled clients who wouldn't be asking for their money back any time soon. Like money from a dead persons trust. A better yet, a dead-pet trust. Or even better: a Japanese corporate client that themselves had a dirty big secret to hide.

And so they found each other: the companies, like an inveterate gambler, desperate for an investment saviour who would, over time, regain their previous losses, rescuing them from humiliation and shame they most dreaded (not to mention a demotion to the Corporate Travel Office, or Janitorial Services Dept.) and Armstrong, now with a fresh load of clients, and more importantly, their cash. In between them stood Cresvale Japan, the securities firm who brought them together, gave legitamacy to both their pursuits, and took nice fees out of the middle in the process, and in so doing torpedoed themselves out of existence.

The scheme worked something like this: Japanese Corporate 'Y' perhaps lost $100,000,000 speculating through a subsidiary, selling Nikkei Put Options or buying boatloads of overvalued shares after consulting with Madame Inoue's Buddhist toad. They were able to hide this for a while by playing "pass the parcel". perhaps between offshore subsidiaries with different year-ends. Thus their consolidated accounts still showed these losses as assets at their full value on their balance sheets. So Armstrong/Cresvale prposed they swap $50,000,000 of new money for a "repair bond" with a maturity value equal to the full $150,000,000 ($100mm of losses + $50mm of new money) and then let Magic Martin do his thing. If things went right, they would make their money back and everyone wins. If something goes wrong, well they can blame the investment losses on Armstrong, call it fraud, and take write-offs, without having to take responsibility in the first instance. (note: this is sketch of the essence, not the actual details).

This is all interesting, but what really fascinated about this story is that in the mid-90s, certain un-named American value investors had eyed a number of Japanese companies that they believed "cheap" because they seemed to have large amounts of cash & marketable securities on their balance sheets, relative to their now-diminished market capitalizations. In some cases it was in excess of their entire market capitalization. Many reasons were put forth explaining the phenomena such as: "empire building"; "saving for a rainy day"; "deflation"; "management conservativeness"; "investor pessimism"; "adverse taxes upon large distributions"; "legal inability to conduct share buy-backs" etc. All seemed somewhat plausible. Conspicuous by its absence, except as speculated by the most hardened, battle weary cynical gaijin observers was: "because it doesn't exist".

But clearly some people HAD to know about their losses. For other foreign banks were in the repair bond business. And many of the companies themselves were household names. Maybe their businesses were not as fraudulent as Armstrong's, but nonetheless their audited accounts and actions were meant to deceive shareholders by masking losses and allowing them be amortized over many years.

Annd since we are writing it, we all now know that things didn't go according to planned. When the Armstrong fraud broke, many of the guilty Japanese Corporates had to come clean. Sort of. They said they were victims of fraud (and some truly were unsuspecting purchasers of Cresvale Bonds), but the "repair Bond" concept and angle was often lost on most observers. Yakult Honsha (TSE#2267) was said to have $1bn of losses, as well as engineering firm Chudenko (#1941); specialty chemcial maker Gun-Ei Co. (#4229) pharma co's. Kissei (#4547), and Towa Pharm (#4553), machine-tool giant Amada Corp (#6113), pneumatic specialist SMC (#6273), eletronic parts mfgr Alps Electric (#6770) advertising agency Asatsu (#9747), office furniture maker Itoki Crebio (#7972) and more than 50 other firms were deemed to be "stung". Yakult's losses were so big that they couldn't blame Armstrong, but many other co.s did, and were "absolved" of culpability for their original sins.

The epilogue was that Armstrong, accused of Fraud, sat in jail for contempt of court, not brought forth to trial for failure to turnover evidence and in particular, tell authorities the whereabouts of $15mm of gold and silver coins and bronze statues he'd squirreled away. It was the longest such languishment for contempt in United States history. All the while, he's claimed that he was innocent of the fraud. I make no judgement here, but it seems likely from the court documents and testimony that he did commit fraud in the form of the ponzi that used new proceeds to pay old losses. His brokers, Republic Bank, (now the behemoth HSBC) coughed up nearly USD$600mm for their part of not alerting autorities to the potential wrong-doing, whichh court documents alledge, they were well aware. But most of the losses were not "embezzlement" or "theft", per se, as the newspapers and Japanese Corporates would have readers believe, but out-and-out ineptitude and shitty trading, for which is no crime, excepting one's sensibilities of the good, the bad, the random and the ugly.

His guilty plea may reflect that Armostrong the man met Armstrong the fraudster. Or it may reflect Armstrong's understanding that having spent six years in jail, an admission of guilt might allow him to squeeze a few years of freedom in his (no pun intended) "Golden Years".

For investors, the only the protection they can afford themselves is doing appropriate due diligence and being highly skeptical of anything that purports to be "too good to be true", or turn base metals or paper into errrrr gold.


R said...

Nicely explained history of Marty Armstrong's trading world.

It should be stated additionally that Martin Armstrong discovered the 8.6 year piX1000 cycle (3141 days) which is statistically significant into the billions to one odds. 6x8.6=51.6 years cycle on which Armstrong believes that confidence in government and private markets alternates. We are currently in a private wave cycle since 1981, this will continue until 2032 when the world's main economies will shift back to confindence in government as they did in the 1930's.

Armstrong's super-computer model with 32,000 variables was so impressive that the CIA and Chinese government tried to aquire it in 1998. His computer forecast that the dow would hit 6000 by 1996 and 10,000 by 1998. It also forcast that July 1,1998 would see a major panic and that that would be the top in the bull market (which it was internally). He also forcast in 1996 at a Vancouver conference that oil would go to minimum $65 a barrel.

He deserves the nobel prize in economics for his work in my view. It is tragic that his trading undid him. His hope was that governments and society could use the cyclical information to try and lessen negative impacts from the negative parts of the bigger cycle. For more info you can read about the man's theoretical brilliance at my site -

R said...

Armstrong also forcast the current commodity cycle we are in, years before it started. This cycle should continue into the end of this decade.

Unfortunately he also forcast a major international debt crisis which is yet to come.

The irony is that politicians can rack up trillions of dollars of debt...essentially theft from future generations, and for that they get paid well with gold plated pensions. Don't expect to see any of them sharing a cell with Marty!

Anonymous said...

Interesting read. If I could add my two cents here…. when reviewing the Martin Armstrong situation it's important to note the following:

1)Republic Bank, the securities firm his company traded thru and kept client funds, was in the middle of a merger negotiation for $10 billion with HSBC when the Japanese FSA started investigating Cresvale/PEI. So when the FSA inquired with Republic for confirmation of client funds Republic then started closing positions without PEI/Amstrong approval and then contacted US authorities before Armstrong new what was going on. This resulted in substantial losses, and their objective was clear: make Armstrong the scapegoat and save the merger with HSBC - which they did by knocking off $500 million from their price tag, which ultimately re-surfaced in the form of payment to the supposed victims in Japan a couple of years later when they finally had to admit guilt for mishandling client funds. But by that time it didn’t matter, they already secured their acquisition and Armstrong was already publicly made out to be the villain. $500 million was a small price for them to pay.

2)Although Armstrong flat out admitted being on the wrong side of trades towards the end and losing a sizeable amount of money, that is no crime. Moreover it's inaccurate to reference quotes from those at Republic Bank as a source for Armstrong's trading performance. In particular, the individual who made the quote you reference regarding Armstrong's performance being no better than "flipping a coin" was later found to have been stealing from PEI accounts while working at Republic. The government later found that this individual, along with one colleague at Republic and a senior person at PEI, orchestrated a scheme in which he siphoned winning trades from PEI and allocated them into personal accounts while taking losing trades and putting them into PEI accounts. Hence, he had every reason to tell people Armstrong's trading was much worse than it really was because he himself was taking millions in winning trades. I believe he is coming up for sentencing of his own soon.

3)One final note, what Armstrong recently plead guilty to is a far cry from what he was originally charged with. He admitted to bad trades, shared accountability with Republic for failing to keep client funds segregated from each other, and took responsibility for allowing sales/marketing materials to continue to go out to prospective clients that promoted favorable trading performance even as he/PEI continued to lose money (hence, the “misleading of clients”).

I'm not here to proclaim Armstrong was without fault, he obviously made mistakes and has paid for them, but there is more that meets the eye in his case and there is a big difference between a legitimate, well intentioned business failing and a business the set out to deceive and defraud from the outset. Clearly Armstrong is the former, not the latter, and his research and contributions to the industry (see earlier post about his discovery of 8.6yr cycle) should be recognized independently.

Cassandra said...

The "Repair Bond" business is hilariously Japanese (though by no means limited to them UPS the large American Delivery Co. was "rumoured" to have done nearly a billion of slow-amortizing repairs bonds for their late 80's early 90's Nikkei & S&P exposures.

I would have loved to been a fly on the wall in some of those meeting between Cresvale & the unsuspecting Japanese Corporates....

Cruising Pablo said...

"I would have loved to been a fly on the wall in some of those meeting between Cresvale & the unsuspecting Japanese Corporates...." - Up until March 2000 Japanese accounting standards allowed balance sheet assets to be valued at cost, or market value or maturity value - therefore none of the Japanese Corporates were unsuspecting of anything, they knew what they needed to do with illiquid portfolios, but what they & Martin Armstrong didn't know is that management in Cresvale Intl Ltd, Tokyo branch, would be shorting the stocks due to be liquidated once Princeton swapped a bond for the portfolio!

The Japanese FSA's enquiry to the Fed about the gross out-flow of funds from Tokyo to Princeton Global notes (plus the accidental addition of a zero) and the Fed's subsequent query to republic was what precipitated the collapse of the Princeton Global accounts. At that time & for many months as attested to by a leading UK law firm MAA had been requesting an audit of the accounts held at Republic!

The FSA request to the Fed was precipitated by Cresvale Tokyo management not passing on answers MAA had supplied to questions from the FSA. Their reasons for not passing on those answers can only be assumed to be connected with the short trading outlined above. One company associated with a Cresvale Tokyo senior exec is now believed to have substantial assets in Western Australia.

Enough people witnessed 1st hand that MAA's could trade consistently profitably & the prosecution brief submitted for the charges the original indictments should just be ignored as fiction generated by 2 self-serving Govt witnesses one of whom had a Republic Bank terminal in his Philadelphia office! (It should be understood that all the original indictments from Sept 99 & super-ceding ones from Sept 03 were dropped at the time he made the final guilty plea which was to 2 matters that were subsidiary fallout issues generated in the final imbroglio of 1999).

MAA thru his Princeton publications had a big mouth & enraged a powerful group of capital market speculators with his accusations of market manipulation & rigging (US T-Bills, COMEX - LME Precious Metals, Mexican & Brazilian Bonds, S E Asian Currencies, & Russian Bonds). He had a US$1B line of Credit at Republic & in Sept 98 he entered a a $100M short trade on the Yen which immediately went against him $300M before he could find a counterparty to close the trade - he found that world-wide it had been very effectively arranged that he not get a market. Documents have been sited whereby Republic Bank officials subsequently offered him a further $1B line-of-credit. MAA also claims that in Sept 99 he had a trade at Republic that was winning by $100M and which disappeared when the "Temporary" Receiver was (illegally) appointed.

The Yen finally did go south subsequent to the liquidation of all of the Princeton Global Bond portfolios!

Anonymous said...

This guy is a genius who was made into a fall guy for Japanese banks and American investors. He's been rotting in a cell to keep him from talking. Ironically, that cell is in downtown Manhattan. Seems the bankers who keep him locked up want to keep an eye on their scapegoat.

Mr Z said...

Looks like we have the global credit crisis that was forecast

Anonymous said...

'Looks like we have the global credit crisis that was forecast'


Anonymous said...

I was Googling info on Armstrong after coming across a 77 page piece he just wrote on Oct. 10/2008(presumably from his Jail cell!). Interesting comments above about his past I must say! Here is the link to the above mentioned article in PDF format, entitled "It's Just Time"




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Anonymous said...

32,000 variables! That's a big number, but I have to wonder if it is big enough? For if the Pi theory is going to turn a market on Hitler's birthday, bigness will be required. Where's a surrealist when you need one?

According to the theory, 2009.3 marks the turn. That works out to noon on April 20th by my reckoning. Synchronize your melting clocks...

youyou said...

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Anonymous said...

The big question of course is, have you seen his new movie Cassandra?! It's quite... in character.

Also, you mention the original 1999 court dockets, do you know where on the internet I can find them?

Gary said...

A writer (Cassandra) who believes what he reads in the mainstream media.

Perpetual confusion lies ahead.