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Martha and Milken and Madoff, Oh My! Profiting From Corporate Criminals and Prison Stocks


It's not easy, but investors determined to do time in this area are sometimes handsomely rewarded.

From where I stand -- on the outside, thankfully -- I've never been able to fathom the prison system. To wit, in 1995, the same year that O.J. Simpson (some would say literally) got away with murder, a poor fellow was sent to the slammer for life for stealing a single slice of pizza. And, criminally, the only executives who have spent time behind bars for their role in the 2008 financial collapse are a couple of folks from Iceland where, as the New York Times put it this past weekend, "At last count, 121 people occupy the nation's jails. And apparently many of them are allowed home for Christmas."

Yet prison evidently exerts an enormous pull on people. When the Bastille was liberated in 1789, some inmates famously refused to leave. (A phenomenon not confined to 18th century France, as illustrated in an incident in the US earlier this year; perhaps it has something to do with the generous jobless benefits on offer.)

Pop culture can't get enough of penitentiaries. Arguably the only scene worth watching in an otherwise dreadfully disappointing Wall Street: Money Never Sleeps was its opening credits, when Gordon Gekko was memorably freed from his cell, armed with only a 23-year-old cellphone. Netflix (NASDAQ:NFLX) is the top S&P 500 (INDEXSP:.INX) stock of 2013, due in no small measure to the success of its Orange Is the New Black. And a film called Prisoners recently topped the weekend box office.

So, if you'll allow me to mix my metaphorical pinstripes and prison stripes, let us examine a "Core Four." What follows is a quartet of both corporate criminals and ways to play correctional facilities.

1. Junk bond king Michael Milken defined the "greed is good" Gekko-era '80s during an extraordinarily successful spell at Drexel Burnham. Yet having personally earned an unheard of $550 million in 1986, half a decade later, his salary topped out at $.40 per hour at the Federal Correctional Institute in Pleasanton, California. District Judge Kimba Wood (who went on to be a failed Bill Clinton nominee to the Supreme Court) sentenced the businessman to 10 years of hard time and 5,400 hours of community service on fraud, racketeering, and insider trading violations. Arguably the Bay Area compound's most infamous inmate was Jane Moore, attempted assassin of President Gerald R. Ford. As its name suggests, Pleasanton -- if not quite the "Club Fed" of popular imagination -- wasn't exactly disagreeable. (The follicularly-challenged financier was, however, compelled to surrender his toupee per prison regulations.) As it turned out, he didn't dally there long; the sentence was reduced on appeal and Milken was a free man as of March 1993.

2. Blue blood Martha Stewart made for a mighty unlikely inmate 55170-054 in Appalachia, but that's where the domestic diva found herself in 2004 after being convicted of conspiracy, perjury, and obstruction of justice in an ImClone Systems insider trading scandal involving her close confidant Sam Waksal. (That Martha -- who left absolutely nothing to chance and was already a multi-millionaire -- would risk her freedom to sell 4,000 measly shares was one of the case's many mysteries.)

Taking inspiration from Nelson Mandela as she started her new life -- "Many, many good people have gone to prison" -- Stewart spent five months in the Alderson, West Virginia, federal penitentiary, among whose alumna was Lynette "Squeaky" Fromme, attempted assassin of President Gerald R. Ford. (Him again? Give the guy a break.)

Although 159-acre Alderson was affectionately known as "Camp Cupcake," scrubbing floors and cleaning offices in khakis couldn't have been too much of "a good thing" for the 63-year old lifestyle goddess, who told Today's Matt Lauer earlier this year that her time inside was "terrible." After serving five months, Martha -- prison moniker: M. Diddy -- was released in the dead of night on March 4, 2005, after which her probation officer mandated five additional months of (palatial) house arrest involving an electronic ankle bracelet.

3. Ex Tyco International (NYSE:TYC) CEO Dennis Kozlowski was found guilty in June 2005 of 22 counts including grand larceny and securities fraud. A jury convicted him of pilfering $600 million from the outfit he headed, proceeds of which were promptly squandered on opulent apartments and Impressionist art. Spending some $6,000 of his firm's funds on a shower curtain while investors were taking a bath undoubtedly didn't go over well with the 12-person panel. What might have sealed his fate, however, was a widely circulated video of his wife's $2 million Sardinia birthday bash showing an ice sculpture of Michelangelo's David spewing vodka from his, well, penal colony. Such egregious excess on the company's dime even resulted in The Donald describing The Dennis as ostentatious, which really is a bit rich.

After being sentenced for up to 25 years, Kozlowski found himself begging for mercy at New York's Mid-State Correctional Facility in Marcy. Here he pulled in $.80 per day delivering laundry at a minimum security institution, whose 8x10 foot cell was quite a climb down from his former Fifth Avenue apartment. The 6'2", 235-pound "Koz" was as pugnacious as his mugshot suggests, and appealed his case all the way to the Supreme Court, which declined to hear it.

Ultimately knuckling down and wisely opting against a prison break -- Tyco is, after all, the world's biggest maker of alarms and security systems -- the 66-year-old Kozlowski eventually became by all accounts a model inmate. Having accrued merit time, earlier this year, he was moved to a facility in Harlem as part of a work-release program, and is due to appear before the parole board in April 2014. To judge by last week's verdict involving his partner in crime, Mark Swartz, Dennis the Menace may soon have a shot at redemption.

4. Bernie Madoff isn't the only executive who is a disgrace to his name; Bernie Ebbers is currently serving a 25-year sentence for securities fraud while in charge of WorldCom. Nor, indeed, is he the sole businessman born in Queens familiar with being locked up; Steve Madden (NASDAQ:SHOO) from Far Rockaway also belongs in that category. But for sheer psychotic brazenness, the former Nasdaq (INDEXNASDAQ:.IXIC) Chairman is in a Category A prison all by himself. He was belatedly arrested on December 11, 2008 for operating a $65 billion Ponzi scheme, the largest in American history. Sent to the slammer for 150 years, Bernie can currently be found with 758 other inmates at the Butner Federal Correction Complex in North Carolina.

Freed from handcuffs, and clearly on a one-man mission to save the Post Office, Madoff has since become a letter-writing machine. His snail mail efforts have ranged from Yuletide missives in 2012 to earlier efforts proudly pointing out, "I have been asked to teach a business class." (The competition must have been considerable, for fellow financier Allen Stanford is a cellmate.) Alas, Mr. Madoff's jailhouse judgment that "It is perfectly safe with no fights" would prove premature when the Wall Street Journal reported he was taken to hospital with fractured ribs and a broken nose following a fracas.

While behind steel bars, the embezzler busily devours Danielle Steel. Optimistically looking ahead to a 11-14-2139 release date, this septuagenarian told CNN earlier this year, "I live with the remorse, the pain I caused everybody," so perhaps he really is trying to clean up his act.

So how can one make money out of all this?

One way to profit is to win the lottery using Madoff's incarceration number. Should you not be so fortunate, there are a few pure prison plays. (As opposed to peripheral stocks such as uniform provider Cintas Corporation (NASDAQ:CTAS), for whom the inmate apparel market is but a small part of its overall business.)

First up, a caveat. For all the frivolous talk of "Club Fed" and "Camp Cupcake," this is literally no laughing matter. As such, I must read you your Miranda rights. Money talks, but you have the right to remain silent in this sector, where equities are often illiquid and Big House outfits invariably can't attract the attention of large investment houses. Cratering crime rates, while wonderful for the population at large, are another reason to avoid leaping into the jumpsuit industry. And lock-up agreements represent an additional danger. (Okay, just kidding on that last one.)

All that said, investors determined to do time in this area are occasionally rewarded with $685 million takeovers. This happened in 2010 when Cornell Companies -- its very name evocative of an Ivy League institution that is as hard to get into as prisons are to get out of -- merged with an equally expensive competitor.

Here, then, are some stocks for the slammer.

1. Corrections Corporation of America (NYSE:CXW) is the undisputed industry leader, operating approximately 67 detention facilities in 20 states. Based in Nashville -- whose favorite sons know how to fulsomely Cash in on prisons -- the stock is approximately 90% owned by institutions and sports a market capitalization of about $4 billion. Shares are essentially flat over the past year, but a roughly 5.64% dividend offers real appeal should the market enter a sustained correction, so to speak. Recent overcrowding reduction proposals in California are an additional avenue of growth for the company. As ever, any prospective investors should consult their tax adviser regarding the reporting requirements of real estate investment trust (REIT)-related names.

2. Boca Raton-based The GEO Group, Inc. (NYSE:GEO) has returned roughly 14% in the past 12 months, broadly on a par with the Dow Average (INDEXDJX:.DJI). The security stock either owns or manages about 100 facilities, with its services encompassing everything from parolee supervision to rehabilitative outreach. It did $377 million in revenues in the most recent quarter, has a price/earnings ratio of roughly 13, and boasts a plump 6.10% yield. The firm survived a stadium-naming fiasco earlier this year, and it is expected to benefit from the burgeoning market for immigrant detention centers.

The next two names are definitely not for widows and orphans, a cohort already badly burned by the high crimes of Madoff et al. When they trade at all, it is highly irregularly and on the pink sheets, so buyer beware.

3. Avalon Correctional Services (OTCMKTS:CITY), founded in 1985, hails from Houston and involves itself with inmate education among other issues. It operates in Oklahoma, Texas, and Wyoming. Personally, I stay away from penny stocks, but you never know. A little bird (Twitter's mountain bluebird, as opposed to the Birdman of Alcatraz, who currently finds himself furloughed by Uncle Sam) told me that once in a blue moon, such speculative issues do shoot up.

4. General Payment Systems (OTCMKTS:GPSI) has gained 445.45% in the past year, but considering that still leaves the stock trading at only $0.60, it continues to go for a song. (Even in Sing Sing.) The Las Vegas company changed its name from Continental Prison Systems in September and has 10,841,741 shares outstanding as of last count. In a just published interview, ex-Qwest CEO Joseph Nacchio told of a torturous time behind bars, where his "money" was mackerel and tuna. (Poor fellow; doesn't he know that Whole Foods (NASDAQ:WFM) offers an altogether more upscale penitentiary tilapia? And to think, they say no big fish have gone to jail for the financial crisis.) Regardless, such a sad plight shed fresh light on the issue of incarceration currency. This firm provides debit card and kiosk products aimed at creating cashless technology that begins with the booking process. These proceeds can then be automatically loaded into the prisoner's account, thus eliminating much manual labor. In 2012, General Payment Systems posted more than $4 million in revenue, and shares recently underwent a 1-100 reverse split.

So there we have it -- four jail stocks to score with. Perhaps you've never considered investing in prisons before. But why not try something different? After all, they say a change is as good as arrest.
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