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WALL STREET is predicting that 2005 will be a year of corporate marriages and initial public offerings of common stocks, and the Street is rejoicing. No doubt for Wall Street, resumption of both kinds of crapshooting will be good. Moneybags will rake in fees on mergers and acquisitions and amass fast bucks on hot new issues. But both activities are signs of a juiced-up market. So here's a warning to local investors: before getting seduced into such dice-rolling, bone up on San Diego's sorry history in the merger/acquisition and initial public offerings, or new issues, games.

As the San Diego experience attests, investors will be the losers. Before every proposed merger, suckers will be told that two plus two equals five. They'll be told that after two companies merge, each will be stronger. But in merger madness, two plus two often equals three. Both entities are likely to end up worse.

Similarly, an initial public offering is an insider's racket. Wall Street gets rich on investment banking fees and in the marketing and manipulation of the stock. Venture capitalists and founders buy their shares for pennies apiece, then unload them for one million percent profits. Ordinary investors, unless they get lucky, are left holding the bag.

A swarm of mergers and new issue offerings is an essential element of a stock market bubble, as was seen in the 1990s. In 1999, the average new issue zoomed 75 percent the first day, a certain omen the bubble would burst, as it did in 2000.

Last month was the hottest December ever for mergers. And in 2004, there were as many new issues as there had been the previous three years combined. So if 2005 is to be a year of mergers and new issues, stocks, selectively, may do well as a bubble expands, but beware: at some point the air begins leaking, slowly or rapidly.

All this means that if you are in the stock market, Wall Street touts will try to get you to buy shares of companies on the acquisition trail or companies that might be bought out for a fat premium. Your broker will try to woo you into a new issue, telling you how rapidly it will soar.

Tell the touts to go to hell. You live in a city that has been hell on earth for innocent lambs who got sucked into these rackets. The following history is revealing for another reason. National news articles on the city's current financial shenanigans repeat the myth that the San Diego business establishment is staid and conservative, that it was known for its cleanliness until recent problems emerged. 'Taint so.

Conglomeration Conjuration

Merger madness has cropped up throughout the history of capitalism, but the insanity peaked in the 1960s. Wall Street would bankroll a company, then tout its stock to the heavens. The company would use the inflated stock, as well as cash generated by massive borrowing, to gobble up doggy, disparate enterprises, then cook the books to make it appear that earnings were soaring.

Conglomeration was a mirage, and suitably enough, the semi-desert of San Diego produced two of the most rattlesnake-infested conglomerates: U.S. Financial and C. Arnholt Smith's Westgate-California.

U.S. Financial began business providing short-term loans to companies. In 1964, it went public at $4.62. Two years later, it acquired the businesses of Robert H. Walter and then installed him as chief executive. One of his businesses was SWAN Constructors. Walter boasted that the acronym stood for "Started Without a Nickel." He also boasted that he "would make housing happen."

Instead, he and colleagues made egregious book-juggling happen. U.S. Financial appeared to have booming sales and earnings because, among many things, it was selling products to itself. These shenanigans were exposed by New York accounting professor Abraham Briloff in articles in Barron's and, in 1972, in his book Unaccountable Accounting: Games Accountants Play.

The stock hit $62 in 1971. Assets were purportedly $311 million. There were 80 subsidiaries and more than 70 joint venture partnerships around the country. Management called it "the Sears Roebuck of the development industry." But in reality, U.S. Financial was like the proverbial 400-pound Texan who is given an enema and shrinks to the size of a Barbie doll.

"It was a conglomerate based on real estate, but it got into insurance companies and things like that," recalls San Diegan Dennis Schmucker, who was bankruptcy trustee and coauthor of a major report on the company's self-inflated bubble. U.S. Financial played two main games. "First, they were front-ending real estate." The company would sell out a development before it opened, such as 939 Coast Boulevard, a high-rise condo in La Jolla, and then book future revenue. Then it would estimate future expenses. "They were substantially understating expenses and therefore overstating profits. They would report profits on projects they really had losses on."

Secondly, "They would develop or acquire a property in Entity A and turn around and sell it to Entity B and book the profits, when Entity B was actually one of their own entities," recalls Schmucker. And sometimes, "Entity B was an outside shill."

There is no evidence that the company ever made any honest money, says Schmucker. "They created phony earnings and used the inflated stock to acquire other properties." Thus, the company was among the first to master the 1960s conglomeration scam.

But all balloons burst. As news clippings from the era related, U.S. Financial became one of the nation's largest Chapter 11 bankruptcies ever, in July 23, 1973. Stockholders got creamed. That was my first day as the new financial editor of the San Diego Union. For several months before arriving, I had been reading in national media about the calamities at U.S. Financial and C. Arnholt Smith's Westgate-California. Thus, the day after the bankruptcy, I was horrified to hear a top editorial executive of Copley Newspapers declare, "These are respectable people in San Diego." Respectable? Didn't anyone read the national financial press?

Walter, the chief executive at U.S. Financial, pleaded no contest in federal court to charges of conspiracy and filing a false report with the Securities and Exchange Commission. He got three years in prison, according to press reports at the time. Two other top executives got prison time on financial fraud charges. Five others got lighter sentences or stiff fines, as reported in local media. The company's accounting firm paid huge sums in civil suits and was censured by the Securities and Exchange Commission.

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