At age 23, Alexander Chatfield Burns launched a private-equity company called Southport Lane Management — and now some its major holdings look to be worthless.
Burns is now 28 and retreated to South Carolina after resigning from Southport Lane in early 2014, according to a profile of Burns and his investment from The Wall Street Journal’s Mark Maremont and Leslie Scism.
Burns’ resignation came after he checked himself into a mental health ward at Bellevue Hospital in New York. The Journal notes that Burns hasn’t been accused of wrongdoing in any criminal or civil proceeding.
The Journal describes Burns as a “financial prodigy.”
When Burns was 13, his mother reportedly told a friend who ran a firm called Twenty-First Securities Corp. that the Black Scholes options pricing model “was wrong.” The Black Scholes model not only won its authors the Nobel Prize but more or less changed the entire options industry and is one of the most important concepts in modern finance.
How Burns got Southport and its major insurance holdings into such a pickle is a little bit complicated, but as the Journal lays it out, Burns used Southport Lane to acquire general liability insurer Dallas National Insurance and then renamed it Freestone Insurance.
A “red flag,” as the Journal calls it, is that Southport paid nothing upfront for Freestone, but agreed to inject $US50 million into the business through a security called, “Beaconsfield Funding ABS Trust 2011.”
But whether or not the “Beaconsfield Funding ABS Trust 2011” was actually worth anything seems questionable, with the Journal writing: “Freestone’s former owner, who kept an economic interest in it, questioned Beaconsfield’s value but hasn’t received a satisfactory answer about it.”
Burns then acquired another insurance company for $US25 million using the $US50 million from Freestone to make this deal happen.
Eventually, Freestone’s assets were written down by $US136 million, leaving the company insolvent, according the Journal. This left Freestone with about $US70 million in “hard-to-value” holdings, and in July 2014, Delaware, which is where Freestone is based, moved to liquidate the company.
The Journal’s report also says that a South Carolina insurer Southport managed trust money for booked a $US113 million in last year’s third quarter, and says two other insurers that Southport either owned or managed money for had illiquid assets valued at about $US40 million.
There was also a $US100 million investment in a telecom startup, though it doesn’t look like much money changed hands and a report from valuation adviser Duff & Phelps said of this deal, “Where the hundred million dollars went we don’t know.”
There’s also a Caravaggio involved.
The Journal writes:
Before Southport’s first insurance-company purchase had closed, he arranged for a Southport entity to buy a painting, purportedly by Caravaggio, titled “David in the Act of Picking up Goliath’s Severed Head,” according to Delaware court filings. The painting, nearly identical to a Caravaggio in Madrid’s Prado museum, would later play a role in the asset swaps.
The filings show Southport agreed to pay $US40 million but put down just $US1.5 million, with the rest due more than five years later.
Though it was deemed a likely Caravaggio by a now-deceased Italian art expert, three auction houses have said in the past it was probably a copy painted long ago, according to filings in a Florida court case involving a trust that had owned the painting.
Before all this broke down, the Journal write that Burns, “called late-night meetings at a penthouse cigar club and donated the wine for a Guggenheim museum event from a vineyard he later bought.”
A former Southport president told the Journal that Burns, “wanted to be a super rich guy.”
In a statement provided to the Journal through his lawyers, Burns said that “Unfortunately, Southport’s restructuring, compounded by the timing of my departure, has left ill will among my former colleagues and distortions and exaggerations about my personality and integrity are inevitable.”