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Friday, March 23, 2007


Someone asked me in the comments of the last post to write something about BGII. I had looked at them here and here.
could you give an update on BGII...? thank you!
They've been accused of smurfing by the IRS. Smurfing is a banking term for a particular part of money laundering. If you have a business which generates a large amount of cash (typically drug dealing, but it could be anything, even coin laundromats or lottery-ish machines), then a significant part of the business is converting physical cash into electronic cash. The IRS requires banks and others to report transactions of $10,000 or more to the IRS for tax purposes. So the obvious response of those attempting to circumvent the IRS is to break down transactions into smaller amounts and deposit them into multiple, seemingly independent accounts. If you go to your local bank every day with $9,999 deposits, they're probably going to report you as suspicious (it's one of the FDIC red flags). This turns into a cat-and-mouse game and a typical method is to split the cash into lots and lots of small chunks and have a large number of "smurfs", typically young males with time on their hands, to carry the cash to lots of individual deposits. But if we're talking about hundreds of thousands of dollars, you've got a problem with finding enough trustworthy smurfs. One of them gets "busted" for some unrelated drug charge and confesses to the money laundering involvement in exchange for a reduced sentence and, bingo, your operation is busted.

Based on the financial statements on their website, BGII has perhaps 15 cents in net cash and marketable securities per fully diluted share and they're making money (4 or 5 cents per fully diluted share for 9 months) and operations are bringing in cash. The stock is selling for 13 cents per share.

Of course they haven't announced any news since 1995 and they went dark quite a while ago.

It looks like they lost the "we're not a gambling machine" case in Alabama on Dec 4, 2006.

But more important is this investigation by the IRS as reported on Dec 1, 2006. The IRS has seized a million dollars of the company's cash.

My guess is that the stock will go nowhere unless the IRS issue is resolved. My guess is also that the allegation is likely to be true because it doesn't seem like one of those things you'd be wrongly accused of doing. But here's the thing: if they've been lying to the IRS, they'd probably also be lying to shareholders and skimming money out of the business and into their pockets: why risk reporting it to shareholders if you're trying to hide it? In fact, it would make more sense that they're more likely to want to cheat the shareholders than the IRS and the tax evasion thing is just a side issue (like Al Capone). But the key thing here is that I only know what I've read on the company's own website.

Here's an interesting book: How to Cheat at Everything

Thank you Bruce. Just wonder how the tax evasion can relate to cheating shareholder? what would the tactic be? Maybe u only meant that they may cheat on shareholder on something else? thanks!
The press release itself states that they report cash balances and revenues to the public each quarter. They also file taxes which is essentially reporting results to the IRS. So if they cheat the IRS by misreporting incoming cash from revenues (which is the most tangible measure within a business), how are they going to avoid showing that cash in the financial statements? And why?

In other words: if you lie to the IRS about something that easy to see, how can you not lie to the shareholders, too? And why would you bother? The incentive is enormous to simply pocket the money rather than take the extra risk of reporting it to shareholders.
en... I see.. thanks again Bruce.. Does that mean that it is possible that they should have reported more cash on their balance sheet? I view BGII is very undervalued if only 1MM was seized.

BTW, BGII did not mention they were accused of smurfing in their press release. Was it obvious to you that it was smurfing based on what they said? Sorry for being so dumb...

BTW, could you take a look of CVCP please? I think it is interesting play. thanks.

I don't know anything for certain. But the idea would be that they could be skimming cash out of the business and it wouldn't show up anywhere. If that were to be true, then I would never even consider investing in them. But I don't know. And it's odd enough that I'd want to stay away.

They didn't say "smurfing" but they said "structuring deposits", which is essentially the same thing.
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