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Strategies & Market Trends : Turnarund Investing

NOVS 0.0666

-16.0%

Aug 1 5:00 PM EST

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To: RalphR who wrote (169)	3/15/2012 8:30:31 AM
From: Covenant	2 Recommendations Read Replies (1) of 1876

You're right, Ralph. Alix Partners usually manage companies with creditor rights and interests being of utmost importance. Shareholder interests are subordinated. DMND was a really good short at higher prices. The current price is not a cant miss shorting opportunity, but there remains some room for valuation to meet at the lower equilibrium price as DMND remains overvalued. What Mike was doing at DMND was not recognizing input costs, delaying them into the following year. Most of these deferred costs should have been in cost of sales with a subset in inventory. For purposes of analysis, I will ignore the small minority of costs attributable to inventory and assume it all effected cost of sales. The first year of the book cooking, the full amount of unrecognized costs flowed to the bottom line as false profits. The second year of the book cooking included recognizing the costs which should have been in the prior year. This would have resulted in terrible results. The solution was to increase the amounts of the book cooking. First, cook the books to offset the reversal of the prior year book cooking. Second, increase the book cooking beyond the amount needed to offset the prior year book cooking. This increase resulted in a dollar for dollar false increase to profit. It is fairly easy to reverse those two known instances of book cooking to come up with pro forma financial statements. Customary valuation techniques show DMND's current stock price as overvalued relative to these restated financials. This is before taking into consideration fraud liabilities. Many shareholder lawsuits have little merit. The shareholder lawsuits at DMND have lots of merit. Current and future stockholders will be paying damages to former stockholders. The numbers will be large relative to market capitalization. DMND is not yet a turnarund. DMND is still on the way down until after the rest of the book cooking is disclosed and the impact of such is understood by the markets. There will be additional unwary investors who get burned by this fraud. When companies cook the books, they rarely only cook one thing. We know about the fraudulent cost of sales. We don't know yet what else was fraudulently stated. We can be sure of one thing though, any further fraudulent misstatement would have been to make the company appear more valuable than the truth. This criminal behavior repeats itself in the capital markets often enough that a discernible pattern is evident.

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