Commentary - 07/16/09

Greenlight Capital? Gold? REDLIGHT!

In the following Bloomberg article, Greenlight Capital Inc. announces that:
Greenlight Holds Bullion, Buys Reinsurance Stocks
July 14, 2009 (Bloomberg) -- Greenlight Capital Inc., the $5 billion hedge-fund firm run by David Einhorn, told investors it switched all of its holdings in a gold exchange-traded fund into bullion during the second quarter.
. . .
The New York-based fund said the cost of keeping gold in a storage facility is less than it paid in fees for the SPDR Gold Trust, according to a letter sent to investors yesterday.
Why do I say, REDLIGHT!
Let us hope, for the sake of Greenlight's clients, that the storage facility is NOT Morgan Stanley.
What makes me suspicious?

Greenlight Capital Inc. is an affiliate of Greenlight Capital RE, and it says so on their web page.

David Einhorn has been a director since July 2004 and Chairman of the Board of Directors since August 6, 2004. Mr. Einhorn is president of Greenlight Capital, Inc., which he co-founded in January 1996, and senior managing member of DME Advisors, LP, or DME Advisors. Greenlight Capital, Inc. and DME Advisors are our affiliates. Mr. Einhorn graduated summa cum laude with distinction from Cornell University in 1991 where he earned a B.A. from the College of Arts and Sciences. Mr. Einhorn also serves as a director of BioFuel Energy Corp. (Nasdaq: BIOF).
Morgan Stanley controls almost 18% of Greenlight Capital RE, and is also the largest major shareholder, as shown below:
Symbol Name Of Corporation

Greenlight Capital Re, Ltd. (As of 31-Mar-2009) (June 30th data N/A yet.)
Top 10 Institutional HoldersSharesPct.Value
Morgan Stanley3,448,01711.50$55,064,831
Khronos, LLC2,150,0007.17$34,335,500
Royal Capital Management, LLC1,380,3614.60$22,044,365
Barclays Global Investors UK Holdings Ltd919,6653.07$14,687,050
Blue Ridge Capital Hlgds LLC882,8922.94$14,099,785
Third Point LLC718,5002.40$11,474,445
Royce & Associates, Inc.697,2122.33$11,134,475
State Street Corporation670,9962.24$10,715,806
Castine Capital Management, LLC650,8002.17$10,393,276
Vanguard Group, Inc. (The)614,5562.05$9,814,459
% of Shares Held by All Insider and 5% Owners:7%
Top 10 [13.3%] of 75 Institutional Holders Control40.47%
Percentage of Barclays and "Associates" Control19.14%
NOTE: Morgan Stanley manages a fund that controls 4.00%.
Van Kampen Funds manages a fund that controls 2.09%.
Royce & Associates, Inc. manages a fund that controls 2.08%.
ISHARES manages two funds that control 1.98%.
Vanguard manages three funds that control 1.81%.
Therefore, the TOP 10 Major Holders control 52.43%, and
Barclays/Associates control 29.29% of Greenlight Capital Re, Ltd.
Morgan Stanley (plus Van Kampen Fund) alone controls 17.59%.
So why should anyone be concerned about Morgan Stanley?

It wasn't that long ago this story appeared:
Morgan Stanley to settle class-action lawsuit

The suit, filed in August 2005, alleged that Morgan Stanley told clients it was selling them precious metals that they would own in full and that the company would store.

But Morgan Stanley either made no investment specifically on behalf of those clients, or it made entirely different investments of lesser value and security, according to the complaint.

The end result of the class-action suit was:
"While we deny the allegations, we settled the case to avoid the cost and distraction of continued litigation," Morgan Stanley said in a statement. . . .
Morgan Stanley (MS.N) will pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, according to a court filing.
So let's hope that David Einhorn's Greenlight Capital isn't jumping from the frying pan into the fire.

For those who would like more details, Theodore Butler offers a worthwhile commentary titled Money for Nothing

I found it appalling that Morgan Stanley would claim to store silver that didnít exist and even have the chutzpah to charge for the storage. That would appear to be a clear case of fraud. I am even more appalled that the judge in the case, or any government regulator, would look the other way. The important lesson here is not that Morgan Stanley got caught with its hand in the cookie jar, but what silver investors can learn from this episode.
Sometimes The Dragon Wins entirely too often.

© 2009 by Edward Ulysses Cate
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