(Ep.28) The Acquirers Podcast: Thomas Braziel – Priority Position, Activism, Bankruptcy, And Off-The-Run Securities

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In this episode of The Acquirer’s Podcast Tobias chats with Thomas Braziel the Founder of 507Capital. 507 Capital specializes in providing liquidity globally by purchasing bankruptcy claims, distressed debt, fraud, liens, judgements, distressed assets, and frozen accounts. During the interview Thomas provided some great insights into:

  • In Investing, Opportunities Are Everywhere, But You Have To Be Looking With The Right Mindset
  • How To File Your Own 13D
  • Workouts Are Special Situations That Can Deliver 20x
  • It Doesn’t Matter How Great You Are At Investing, Sometimes You Have To Wait To Get Your Cash Out
  • We Came This Close To Buying The Domestic Support Obligations Of DMX (Rapper)
  • You Can Even Invest In Distressed Crypto If You Position Properly And Consider The Risk/Reward
  • How We Turned A $20,000 Investment Into Millions Using Just A Small Position – Fun.com
  • Distressed Investing – How To “Paper’ A Deal Without Committing Light Treason
  • Invest Like David Tepper – Search For Stocks With ‘Cheap Optionality’

The Acquirers Podcast

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Full Transcript

Thomas Braziel: I love fraud. Oh, don’t take me out of context.

Tobias Carlisle: You ready?

Thomas Braziel: Yeah, sure. Let’s do it.

Tobias Carlisle: Hi, I’m Tobias Carlisle. This is the Acquirers Podcast. My special guest today is Thomas Braziel of 507 Capital Management. Thomas has got a specialization in some very unusual securities. He likes things in bankruptcy, he likes fraud, he likes something that’s well off the run. We’re going to talk to him right after this.

Speaker 3: Tobais Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirer’s funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.

Tobias Carlisle: Hi, Tom. How are you?

Thomas Braziel: Good. How are you?

Tobias Carlisle: So we’ve been having some great conversation before we started, and I hope that we can keep that going now.

Thomas Braziel: I’ll try.

Tobias Carlisle: A mutual friend of ours, Toby [inaudible 00:01:22], introduced us, and he said, ‘You’ve got to read this story.’ And I remember Toby telling me about this in real time as it was happening. Ethanex Energy, can you take us through-

Thomas Braziel: Oh really, that one? Yeah.

Tobias Carlisle: What happened? Or maybe it was fun.com.

Thomas Braziel: Oh fun.com. Very similar.

Tobias Carlisle: Let’s start with Ethanex Energy.

Thomas Braziel: Yeah. So it’s great to be on the program. It’s fun, I’m glad you’re doing the podcast, it’s very cool. I’ve been binge watching a few, and it’s great to chat in person… or to really chat. I’ve always been interested in investing, I don’t know where to start with Ethanex, I guess I’ll-

Tobias Carlisle: How did you find it?

Thomas Braziel: Yeah. So actually, believe it or not, Ethanex was on a net-net screen. I was in grad school at the time, and I was studying, believe it or not, quantitative finance, which has nothing to do, well I wouldn’t say nothing to do, because it’s all kind of about investing in business. I was supposed to be studying my quantitative finance, instead somehow I ended up picking up the newest edition of Securities Analysis with the Ford [inaudible 00:02:30] current managers, which is phenomenal.

Thomas Braziel: I had actually read Securities Analysis when I was like nineteen or eighteen, but the long story short, was I read Edition four with all the coddle… It kind of ruined it because it gutted a lot of the grand philosophy in the middle. You really want to read the first two editions or you want to skip forward to the new editions.

Tobias Carlisle: I’m with you 100%.

Thomas Braziel: Okay, yeah. Okay. You have to be a real nerd to be like, ‘The editions are different.’ You know? Anyway. They really are. I swear. Anyways, the newest edition. I read it and I was blown away. One of the things that, there are so many great Graham stories in there, one is in investing in liquidations and investing in litigations and all these crazy things. You’re like, ‘Wow. That’s Graham?’ Everyone thought that you’d think Graham, you’d just think Net-Net. You don’t really think of all this color that he had on really doing special situation investing.

Thomas Braziel: Anyway, I read the book and I was like, ‘My parents are actually bankruptcy lawyers.’ Not big time bankruptcy lawyers but they’re bankruptcy lawyers. I was like, ‘I know at decent amount about bankruptcy. I’ll start looking around for stuff as it comes up.’ I happened to come across, I was trolling on a Net-Net screen, and one of the companies on there was a company that was bankrupt. It was a tiny market cap. I mean really small, like 200,000, $150,000 market cap, so absolutely tiny. This is not for any managers, this is all for home gamers, I guess is the term. Any home gamer out there. This stuff exists and that’s one of the things I hope to get across in this conversation, which is I believe that opportunity is everywhere and this is a great vignette of that, I think.

Thomas Braziel: So, found this company and I noticed it’s in bankruptcy. I said, ‘I know about bankruptcy. Why don’t I try to research it and see if there’s something here?’ That’s how it all started. That was the premise. I started pulling open the bankruptcy docket. I don’t know that much about, at the time I didn’t know as much as I do now about distress in bankruptcy and how things work. The chapter seven liquidation, there’s actually no asset case, which means that the recovery to the equity would be almost, like just a very long shot. When I was reading the trustee reports, I was saying, ‘Oh, look at this. This is quite interesting.’ The recover to the equity could be just a tiny amount.

Thomas Braziel: In fact, actually, because of the way the company was taken public, they actually have a pretty good lawsuit against the former director, who was also their legal council. Basically, the company had gone public through a burst merger pipe deal and the guy that had helped them at burst merger pipe was a partner at McGuireWoods, a large law firm you can Google. He basically lined his own pockets by taking part in the reverse merger pipe deal, so his own capital and then basically slipping the shares after the first day. He’d send out bogus opinion letters with the McGuireWoods stationery saying, ‘Yeah. You can take the legends off these guys shares. They’re good.’ What he meant was good, he meant his own vehicles were good. So, that was the fraud.

Thomas Braziel: It actually worked really well. He did it about seven times. He never spent the money, I mean he did spend maybe a little bit of it, but real recover was the fact that he didn’t spend any of the money and then when they sued him, he had all the money. That was a forfeiture action with the government. In that case, there were two sources of recovery. One was, and this was all in the bankruptcy docket if you were able to crack it open, was that you could get some recover to the equity, actually, through these, were called restitution or remission payments on forfeiture actions.

Thomas Braziel: If the government seizes your nice telescope behind you because you’re a drug dealer and they’ve taken all your stuff away. Let’s say that somehow you had a claim on that property, because you defrauded me. I could actually get that telescope. That’s basically what you do in these forfeiture cases. This guy had defrauded the company, so they had a claim against him. They were able to actually, through the short-swing profit rules and restitution payments for charging him for his legal services, when really he was defrauding the company, they were able to demand money from the government seizure.

Tobias Carlisle: He was charging for his fraudulent services?

Thomas Braziel: Yeah, that’s great. You get it coming and going. That’s a real business there. I’m in the wrong business.

Tobias Carlisle: That’s smart.

Thomas Braziel: Yeah. Yeah, exactly. That was one source of recovery and that was plain in the docket… You could of read, what are called the trustee reports. Chapter sevens are different then elevens. You’re Australian and Australia, they call them administrations and in the states, we call them caps on liquidations. Basically there’s a trustee who comes in, he sits in the shoes of the manager and basically just liquidates out all the assets and tries to pay the creditors depending upon the pecking order. Right? You have secured creditors, preferential creditors, [inaudible 00:07:30] and things like that. [inaudible 00:07:31] very, very, very bottom of the equity holders.

Thomas Braziel: In this case, the cut of the restitution and remission payments, I knew from my purchase price, which is about a $200,000 market cap, that we were talking about a penny stock basically, that I was going to make four, five, six times my money, which I was like, ‘Whoa. Are these numbers right?’ Of course, I’m calling the trustee and I’m getting him to walk me through it line by line. Is this accurate? Is this right? What’s this? What’s this? The trustee didn’t even understand what I…

Thomas Braziel: What’s funny and this is what I find interesting about opportunity in general is someone could be so close to the opportunity but they don’t have the mindset because they’re too busy keeping the whatever cap they’ve got on. This guy, he’s like, ‘I’m just trustee. I don’t know anything about buying bankruptcy claims or buying equity.’ He very well knew the story, he could have told his friend this story. There wouldn’t have been inside training that said, ‘Hey, you should look at this bankruptcy case. This is a little public company and there’s stock that trades.’ He never did that. This trustee whose now a good friend of mine, he didn’t add it all up.

Thomas Braziel: Anyways, that was one source of recover. The other big source of recover was a lawsuit against McGuireWoods. Partnerships are liable for the actions of their partners. You can’t throw somebody under the bus if they’re literally a partner. I don’t mean partner like Goldman partner, there’s no Goldman partners anymore. It’s a public company. I mean like real partnerships. [inaudible 00:09:02] private and those guys that claim that their managing directors were actually partners, then they would be liable for their actions. It’s actually a good risk mitigation tool for Goldman, so it’s probably good they went public.

Thomas Braziel: Those have been two sources of recovery. If I was older and knew a lot more about distress like I do now, we could have really done well. We still did very well, so I basically bought up about 10% of the stock in the public market, which wasn’t a lot. I was broke. I was a college student. I wasn’t broke, but I had a $10,000, basically, to buy the stock and then I also-

Tobias Carlisle: Did you file your 13D?

Thomas Braziel: I did. I did.

Tobias Carlisle: Did you really?

Thomas Braziel: I follow the rules. I filed my 13D. I filed my 13D and 13D-As, man. I’m hands on it. I did myself. I didn’t pay 400 bucks for somebody else to do it. You should see it, the formatting is terrible.

Tobias Carlisle: Handwritten?

Thomas Braziel: Yeah, handwritten. Actually, I bet you could do a handwritten one. I don’t know how you’d file it though, because all the EDGAR filing system is all electronic now, but maybe you could. I don’t know. I don’t know. Yeah. Totally terrible formatted, terribly formatted. It’s not that hard.

Thomas Braziel: So, wait. Yes. I bought a public stock. I bought about 10% at about $200,000 evaluation and I also bought some restricted share blocks. I actually have physical certificates that I bought off people, which was a lot of fun. That kind of reminds me of the old Buffet story. I can’t remember what stock it was that he did this with, but at the time I was actually reading Snowball as well. I remember him going door to door, apparently, to buy some security. It kind of reminded me of that story, so I felt good about it. I was like, ‘Oh, I’m just like Buffet. I feel so good.’

Thomas Braziel: Except for in the Snowball, she says that he was breaking Williams Act rules, so I started searching Williams Act and I was kind of worried that I might be breaking Williams Act rules, but she’s actually wrong. There’s no anti-solicitation for stock that’s legend stock, because it’s legend stock. It’s restricted stock already. It would only be anti-solicitation Williams Act rules if it’s publicly traded stock. If I said, ‘Hey, Toby. Why don’t you sell me your,’ I’m going to guess which stock you own, let’s see, ‘Merlin. Let me buy your Merlin.’ Well, Merlin just got bought, so I had to think of something else. Let’s think about a value stack.

Thomas Braziel: Anyways, that was a fun case and I can get more color on it, but that’s the gist of it.

Tobias Carlisle: So, you bought the shares… Some of the restricted stock that you bought was including the chairman, right? Of the now-

Thomas Braziel: I did. I wonder if I can do a screen share of this. I can show you the certificate. Recently, I’ve been wanting to do this forever and I finally did it, which I had a little tombstone made of the actual chair certificate, which I love. I haven’t actually seen it because it’s in New York, but I just love the idea.

Tobias Carlisle: If you send me the picture, we’ll put it up on the post.

Thomas Braziel: All right. All right. All right. All right. I’ll send a photo. It’s the nicest guy ever and I’ll give you some of the story on this. This guy, remember who this was, this was an ethanol company that was going public during the heavy times of alternative energy, pre-financial crisis. They were doing a burst merger pipe deal. Pipes were big, you get basically these… Anyways, the burst merger pipe and this guy was the industry guy for ethanol. They made him the chairman and they gave him a whole bunch of stock and all this stuff. He owned like 10% of the company, basically, just the coming and add gravitas to the project. When this thing went sideways and this guy ended up defrauding the company, it was a big, you know? This was a smudge or whatever you’d say, this was a stain on this guy’s reputation as someone in the industry. He was more than happy to wash his hands of it.

Thomas Braziel: It was so funny. I remember calling him, his name was Robert C. Walter. I called Robert up. Picks up, he’s kind of an older guy and he says, ‘You want the certificate?’ He’s like, ‘This certificates worthless.’ I was like, ‘Well, you know? I think it’s worth a little something and I think the workout value could be, over time, a few multiples…’ I was pretty straight with him. I didn’t even really go into litigation, but I said, ‘You could make some money on it.’ He said, ‘Look. You send me a contract.’ I wrote my own contract. This is not good advice, by the way, you shouldn’t write your own contracts. Now I know that in hindsight. I sent him a contract, he signed it, I sent him a certified check from Vanguard. A check, literally, from my Vanguard-

Tobias Carlisle: From your brokerage account?

Thomas Braziel: Yeah, my brokerage account. Literally. That’s what I did. I still have the check stubs. I’m sure I could pull those up. The guy thought I was nuts. I think my parents even, my parents are bankruptcy lawyers. My mother, I remember speaking to her, and she’s like, ‘Are you sure you know what you’re doing?’ I was like, ‘But look at the numbers and look at the work out value. It all kind of adds up. You just have to file all the numbers.’ She was being credulous, but she was like, ‘All right. This is my sons money, do what he wants with his twenty grand. Whatever.’

Thomas Braziel: I bought about $10,000 of stock, might have been a little more than that. Then, I bought 25,000-ish of restricted stock, mostly was Robert C. Walter’s. That was a good one to snag and I got that under a $200,000 valuation. At the end of the day, the workout value was about six and a half million dollars, market cap workout. It could have been, you can hire… The long story short is I bought them for four cents, five cents, six cents and the workout value was 92, 93 cents on the dollar.

Tobias Carlisle: Wow.

Thomas Braziel: Yeah, it was a good one. It was a good one, but it was one of those things where… Well, first of all. It did take two and a half years, so it’s not like it happened overnight. What’s been fun about it and I was telling you this off camera, before we started and you’re like, ‘Oh, no wait.’ Even though it took two and a half years, which you think, ‘Oh, my God. You made 23 times your money in two and a half years. That’s amazing.’ I still had to wait two and a half years.

Thomas Braziel: The funny thing about making a really good investment is I feel like you really do know pretty early on. You’re like, ‘Oh. Yup. That was good.’ Especially when its private deals versus public, stock, you know? You’re buying from marginal sellers. You’re taking advantage of that dislocation of that marginal buyer and seller or supply and demand or whatever you want to call it.

Thomas Braziel: In the private markets, normally when you ink a deal, you know right then. Wow. That was good. You know right when you do it. You still have to wait because it’s private. It doesn’t matter how great you think you are. You have to wait until you actually get your cash out.

Tobias Carlisle: Even though you’ve done quantitative finance, mathematics at Columbia. That’s your Masters. You’ve got this passion for these unusual bankruptcy, liquid claims, distressed debt, distressed assets, and so now you’ve set up a firm, 507 Capital Management. What’s the 507 mean?

Thomas Braziel: Okay. So, 507 and I should say the whole idea genesis of BE Capital, which was my former firm with another partner and now 507, was to basically try to not institutionalize, but try to make a business out of finding stuff like that. Finding Ethanex’s. A more portfolio approach, but basically the idea is like something no one bothered to look at. Try to be lean, so you can be small and take advantage of it.

Thomas Braziel: 507 is actually the portion of the bankruptcy code that sets out the priority scheme. I don’t know if I told you this in the email. It’s basically the people that get paid first, so that’s a little play on that. Whenever you call a bankruptcy attorney and you’re like, ‘Oh, are you guys looking for a,’ we do a lot of DIP work, so debtor-in-possession loans and stuff, and they’re like, ‘507. What? Like the priority code.’ You’re like, ‘Yes.’ They’re like, ‘Oh, I get it. That’s funny.’ It’s a very inside joke. Only a bankruptcy attorney, believe it or not, some of the bankruptcy attorneys don’t even know.

Tobias Carlisle: No particular section of the code is as important to them as that is to you. That’s why they necessarily don’t-

Thomas Braziel: Well, they should because it lays out that they could get paid like [inaudible 00:17:36] outside secure claims. So, the 507 is, at first people are child support and after child support… You know? Most corporate bankruptcies don’t have child support in there, but that’s the priority scheme. 507A1A is in child support. 507A2A is domestic support obligations, so basically if you’d have been divorced. Number three is admin claims and it’s where the state professionals get paid.

Tobias Carlisle: Right.

Thomas Braziel: Actually, believe it or not, in one case and actually, God, I could tell some hilarious stories. Was it 50 Cent? Yeah, I think it was 50 Cent. No, it wasn’t 50 Cent. It was DMX filed for bankruptcy. DMX has had like nine children with like eight different women, so all of his debts were domestic support obligations. We came this close to buying his domestic support obligation. You can technically buy them, you know? 507A2, domestic support. That would be great. I’m trying to fill 507. I want to get one claim from every single ladder. [crosstalk 00:18:50].

Tobias Carlisle: The investment that I was referring to before, I think I got a little confused there. The one that Toby [inaudible 00:19:00] was telling me about. I think he was telling me about it in real time or maybe he was telling me slightly after the fact, but it was the fun.com investment.

Thomas Braziel: Yeah. That was a little different in the sense of it wasn’t as sure thing as Ethanex. I should say that whenever I’m telling one of these stories, it’s not like it’s the only thing going on. At the time, Ethanex really was all my money because I really thought that we were guaranteed to make a few times our money and then the upside was you got the litigation for free.

Thomas Braziel: Fun.com was interesting. Fun.com was more than a penny stock, it was like a nano penny stock. It traded for literally pennies, two, three cents or something. I guess Ethanex started that way as well. It was a $100,000 market cap, companies basically dead. The guy that ran it was fraudster. That’s part of the story. Fun.com was a company that basically a pump and dump scheme. What they did is they basically inflated a fake balance sheet and then used that fake balance sheet to buy real companies. Sounds a lot like the other companies you might know.

Tobias Carlisle: That’s a legitimate strategy. That’s a completely legitimate strategy.

Thomas Braziel: Yeah. You’re like, ‘What’s wrong with that? What’s wrong with that strategy?’ I won’t cough and name any companies.

Thomas Braziel: The idea was a fake balance sheet, buy real companies and it was a really smart. You actually say, ‘Hey, Toby. You’re such a good guy. I got this company that’s got $30 million in asset value. You’re such a good guy and knowing you’re going to be in for the long haul. This and this and this. Why don’t I sell you some stock at half a book value? And since you’re such a good guy and you’re going to help me out. You’re of course going to buy up your clients, you’re not actually going to buy it. Why don’t I give you a little something? Just as a thank you. It’s not a kickback. Who said the word kickback? I’m just saying that I would really appreciate that.’ That was the play. He would raise money with this fake balance sheet, basically pitching to brokers like IRAs and whatnot. They get their clients in and then you give them a little something as well, so everybody’s paying everybody and everybody’s happy, of course, until the whole thing blows up.

Thomas Braziel: The interesting thing is, he made a few interesting investments. One of the things he either bought or drove into the company was a domain called fun.com. That was basically the premise of the whole company was that it was going to be a market place for everything investment related. Think of it as, I think I remember seeing old deck about it when we finally got in control of the company, who basically said it was going to be, I can’t remember if he referred to it as an Amazon, but he basically referred to it as like everything you need to know or everything about investing is going to be all on this website. Kind of like investing.com, but it’s called fun.com.

Thomas Braziel: He had a domain, he had invested in a ETF provider. I could think of some color, but I won’t go into specifics, but anybody who really wants to can research it. There was an ETF provider that they owned a chunk of and there were a few other things. At the time, the stock was totally bombed out. Everybody knew the guy who ran it was a crook. They were like, ‘What’s the point of buying equity? Anything that comes in the business, this guys trying to steal.’ I said, ‘All right. Well, you know? Stranger things have happened. Maybe something happens. Maybe I’ll die, I’ll just sit on the bid and get filled.’

Thomas Braziel: I sat on the bid for two years and basically ended up owning 20% of the company at like $100,000 valuation. Literally, it was a $20,000 investment. Long story short is, I had tried a few things, activism things like books and records stuff and [inaudible 00:22:51] corporate law some disclosure, didn’t get anywhere. Then, something really interesting happened. The gentleman that was the puppet master, this guy Jason [inaudible 00:23:02], gets indicted. He gets indicted by the government, not in fun.com, but in something else, another fraud he’s got. This guy, he’s got frauds going on in every town.

Thomas Braziel: It was this, believe it or not, American Indian, Native American bond scandal. Basically they raised this money for this Indian tribe and then, of course, the money was supposed to go to [inaudible 00:23:29] Casino or something. Instead, they were like, ‘Oh, yeah. We’ll help you with this. We’re the investment manager, we’ll help you raise the money.’ But they never turned the money over to the Indians, they basically just kept it and spent it.

Thomas Braziel: He gets indicted for that and the guy, I kind of found the person that was sort of running the show, sole director and sole CEO for this bond out, non-reporting OTC company. I was like, ‘What are you going to do? This guys indicted, he’s not going to be able to,’ and he was [inaudible 00:23:59]. He did not say it. That’s an English term, he was not talking. Eventually I was like, ‘You know what?’ I read a bunch about Delaware code that do this and one of the things I had learned about was receivership. If you have a company that’s basically been left for dead, you can appoint a receiver. It’s very similar to bankruptcy laws. They have state receivership and assign for the benefit of creditor type stuff, it was very similar to a state run bankruptcy almost.

Thomas Braziel: Anyway, I was like, ‘Hey, I should really go for receivership. This is the time. This guys not going to respond, we’re going to get it by default.’ So, we literally went to Delaware, filed a receivership motion and got appointed receiver. What can I say? What’s great as well is the guy that was running the company, this is what really happened, he stopped getting checks from [inaudible 00:24:53]. When he stopped getting checks, he was like, ‘Well, I don’t work for free and this guys now in jail. Maybe I should just say, oh.’ He actually filed an affidavit in support of us being appointed receiver, which is crazy, he was supposed to be the one running the company.

Thomas Braziel: We get involved and become the receiver. We start marshaling assets. There were two big assets. One, basically, was this ownership and this disputed ownership, because it was disputed how much they owed of this ETF provider. It wasn’t a huge ETF provider, it was like a billion, two billion dollar, which sounds like a lot but ETF margins are thin. You might know if you’ve ever tried to find… I don’t know. Did you ever run across this company?

Tobias Carlisle: I know who it is, yeah. I know that it’s advisor shares. I know the company.

Thomas Braziel: Yeah, yeah, yeah. I’ll give color without giving… because I don’t want anybody to get upset, but these are the facts. That facts were there was dispute about how much they owned, there was dispute about a capital call. At the end of the day, there was a settlement. We were able to settle it and basically, instead of the cash just going to [inaudible 00:26:07], it was not behind bars. We basically had it come to our corporate bank accounts, which now I control.

Thomas Braziel: That was one source of recover and another source of recovery was the domain itself, which he had of course taken control of through a forbearance agreement because he claimed he had all this insider debt, which is really bogus. First of all, my favorite part about the debt pieces, the two million dollar piece of debt, but it had, I think a 3% late fee per month. Basically, the rate was like, I don’t even know, 50% per year APR, which of course [inaudible 00:26:44] and we got totally thrown out by the Delaware court.

Thomas Braziel: The receivership was the advisor shares recovery through [inaudible 00:26:54] and then the selling of the domain and that’s basically a few million bucks. There is basically receivership reports that are out there that say the numbers, but that’s a few million bucks. $20,000 for 22 in the company. Not bad.

Thomas Braziel: All the other people, there are a number of people, and I know Toby. That’s why, Toby and I had talked about fun.com over the years. He was always curious and the whole premise of the investment was, there’s actually a lot of value here. Good things can happen because there’s a lot a value. [inaudible 00:27:37]. It was no way a sure thing that you were going to really make a killing on the company in the same way that other things are more. That’s a waiting thing, that’s like any portfolio. It’s like, ‘Well, I’m not sure if this is going to work, but if it does, I’m going to make 100 times my money, so okay. I can lose 2% of my portfolio.’ Or whatever you’re comfortable, 5%, 2%, 1%. It’s like any sort of portfolio.

Thomas Braziel: One thing, as I get older but as I just try to think more logically about investing. I think sometimes as investors, were a bit too black and white and we’re not willing to be wrong. I think it’s important to remember that sort of… I don’t know. I don’t know where your thoughts are.

Tobias Carlisle: No, I agree completely. I think that if there are positions that are potentially zeros or massive payouts, then you size it like an option that could expire worthless, but could have a very high payout. Whatever that is for you, 1% or 5% or whatever.

Thomas Braziel: Right. I also think it’s a setup thing. Sometimes you see a setup, because I think that’s really your goal, even in distress, I feel like the goal is positioning and setup. Position. Position. Position. So much is about positioning and finding those really awesome setups. So much is like prognosticating about the future, like, ‘Oh, my God. Phosphates going to go to 5,000 and that means these stocks go on a 55 hundred.’ It’s prognosticating. I don’t disagree with people that do it, I think there are just a million ways to make money in public and private markets and all kind of different areas. I definitely think that in securities markets, and in a lot of places, it’s sometimes more about positioning more than influencing or being able to know the outcome of certainty.

Tobias Carlisle: What do you mean by positioning?

Thomas Braziel: Oh. Well, for us in distress, it’s like fulcrum security type stuff. You’re trying really hard to… Let’s take a case. These are really small because we do some small cases. Let’s say you got a million in secured and you’ve got five million of unsecured and then maybe you got… Well, I could walk you through a live case. You want to walk through a live case?

Tobias Carlisle: Yeah, let’s do that.

Thomas Braziel: Okay. That’s more fun. I don’t want to get in trouble with anybody. The first ICO bankruptcy is this company called Gigawatt. ICO, initial coin offering. One of the main areas we actually work on now is crypto in distress, believe it or not. It’s not a hot area, but it’s a hot area for us. If you’re someone that likes a space, the discounts are pretty huge. Now, of course if crypto goes zero and goes away and it’s not the future, then you’re not looking at very good return. There are still ways to play it and get the optionality while staying safe, which is what we really try to do. That’s something about positioning.

Thomas Braziel: In one trade that we’re working on, and I can’t talk too much about it, but basically what we do is when we’re buying bankruptcy claims in this one docket, we’re basically buying something where if crypto goes to zero, we’re okay with IRR because of the state has other recoveries and the bankruptcies. State has other recoveries that will allow us to make an okay return. I wouldn’t say, I guess it’s a Mohnish Pabrai, you know? Sort of like heads, I don’t lose much or heads, I win a lot and tails, I don’t lose much. This is like actually tails, I make a little and heads, I make a lot. That’s the kind of stuff you can find, not only in crypto distress, but all areas of distress if you position yourself properly and really think about the risk reward of every transaction.

Thomas Braziel: The one live example in the states, where it’s basically the first ICO bankruptcy is there’s a little bit of secure debt, a decent amount of unsecured debt, which they could trade client with, which is like a bread and butter business for us. Another is customer account claims and then you’ve got even tokens, because they had an ICO. What are tokens? Oh, jeez.

Thomas Braziel: It’s complicated, right? But if you have an idea about what the value of the business is and you get healthy, healthy discounts and position yourself so that maybe you own a little bit of the top tier, maybe a little bit of the secured to make sure things really go south, you’re going to be able to be there and own that. At the same time, you’re kind of layering further down. Maybe you want to own some tokens, maybe you want to own some general unsecured claims.

Thomas Braziel: I do the same thing. I’ve got some guys that do structured credit stuff where they’ll loan the bonds and they’re using the coupon of the bond to basically belong the equity or to lever up on the warrants or something like that. I think one of the nice things about distress and we were talking before we got on, is disciplines in investing. I think that distress is really cool because it teaches you the discipline of the whole capital stack and being really creative about how you think about it. Sometimes the thing about, when you’re just looking at stocks, you kind of get really… There’s only permutation, which is the stock, but when you’ve got distress, it makes you think of the whole cap stack. Where do i want to be? What’s the best risk reward on GE right now? Is it the bonds? Is it the equity?

Thomas Braziel: When you get distress, it gets even more interesting. You’re in California, okay. PG&E, big bankruptcy case, right? Where do you want to be in the cap stack? You want to be in the bottom? Do you want to be in the equity? There’s trade claims you can buy. There’s mechanic claims you can buy. There’s all kinds of… That to me is really fun. Anyway. I forgot what the question was.

Tobias Carlisle: No, that was good. We started out about fun.com. Did you discover the crypto opportunity through Mt. Gox.

Thomas Braziel: Yes. That’s something we work on, yes. [crosstalk 00:34:06]. Yeah, I can.

Tobias Carlisle: Can you tell us the Mt. Gox story?

Thomas Braziel: Oh, gosh. This is going to sound mean. I was reading in the FTE how some hedge funds were trying to buy Mt. Gox. This was like three or four years ago, Mt. Gox claims.

Tobias Carlisle: What’s Mt. Gox?

Thomas Braziel: Mt. Gox was the largest bankruptcy. No, it’s not a large bankruptcy. It was the largest crypto exchange before it went bankrupt. What happened was, basically, three fourths of the tokens just disappeared. Tokens, bitcoin disappeared. Of course, people were very upset. At the time, crypto was only at about 400, 450 US dollars to one bitcoin. When you have 25% of the coins left, but then crypto [inaudible 00:34:56] on you, that’s 100% repaid case.

Thomas Braziel: I was actually buying when crypto was like a thousand. I was making doubles on the claims I was buying through, at the time, BE, for my fund. I read in the FTE that some hedge funds were looking at this. I was like, ‘I don’t know why the guys would buy this stuff?’ That work in bankruptcy, trade claims. I’m like, ‘I don’t know. It’s super smart. I bet I could figure this out.’ I started poking around and papering the first one was really hard.

Thomas Braziel: I think that’s something about opportunities everywhere. People say, ‘Oh, I don’t know how to do bankruptcy foreclosure or private mortgages. I don’t know how to do it.’ Of course, you don’t know how to do it, you have to just kind of push the boat out and learn a little bit. Don’t risk your whole life savings.

Thomas Braziel: In the area we work in or I work in, I feel like the hardest thing is papering stuff. People will say things, ‘How do you get comfortable with this transaction?’ Being like, ‘Well, we do it through spending, first, our whole lives trying to paper stuff and figure out how to paper is securely. Also, months and months on a deal is basically figuring out how to paper it so that you’re secured. Not secured in the secured debt sense, but secured in the sense of there’s no slippage between what opportunity or exposure you want and just having a papering bumble so if somebody walks off with your money or something.’

Thomas Braziel: Yeah. I read an FTE. I was surprised. I was like, ‘I know people do this stuff.’ I should say this one thing. When I was running the capitals, it’s quite a small fund, so once I pulled myself up, we were kind of working for larger distress firms and hedge funds. I don’t know if it’s a scary secret, but one of the funny secrets about distress is most of these guys find stuff through other means, right? There’s always brokers and stuff. Sometimes we’re working for some very large and well known people. So, I started sniffing around Mt. Gox and I was like, ‘I know people that broker this stuff. They don’t know what they’re doing. I’m going to look at this.’ So, I started looking at it. Was able to paper a transaction, took a minute to do.

Tobias Carlisle: What does papering mean?

Thomas Braziel: Papering is like, when you buy a stock, it’s all figured out for you. You don’t have to do anything. You’re just like, ‘Boop. Okay, that was easy. All right. Lunch time everybody. I decided to buy some stock today.’ When you’re buying a claim or you’re doing something in the private market sector, you have to paper the whole thing. Papering is the contracts, right? The agreements.

Thomas Braziel: For instance of Mt. Gox, we weren’t really sure how to paper it, we had to make sure we had enough escrow, what does the contact need to say, what are the representations of warranties in the contract, how do you actually transfer the claim. It’s Japan, everything’s in Japanese. Luckily everything’s in half English and half Japanese, or it’s in both, it’s in dual language. I was able to get it done and work through that. That in of itself is super valuable for these trades, knowing how to construct and manage that risk is part of the transactions you’re doing. Maybe no one’s done a deal in Latvia, maybe no one’s done a deal in Poland or of this kind of transaction. Maybe there’s transferability issues and you need to figure that out or how to work around it. Maybe there’s US law sanctions against doing it and you need to find ways that are totally legal. It’s a paper.

Tobias Carlisle: You don’t want to commit any light treason.

Thomas Braziel: Yeah. Light treason, I always like that phrase. Might of been a little bit of light treason. Is there such a thing?

Thomas Braziel: It’s real. You need to spend a lot of time on that and that’s, not the majority of the time, but I would say that that’s where the real creativity comes in. If you worked through the analysis of a workout, because that’s what these really are, all these kind of things are really a lot of them are workouts. You’re like, ‘Oh, my God. That’s it. That’s so simple.’ You’re like, ‘Yes, of course its simple because I’ve done all the work for you and you ain’t got to be able to paper it and manage the risk of transferring with it and transacting in it.’

Thomas Braziel: Also, you have to be able to source it, the whole sourcing is a real thing. Again, you can’t call fidelity and be like, ‘Buy me some’… I don’t know.

Tobias Carlisle: [crosstalk 00:39:34]

Thomas Braziel: Yeah. You have to be able to source it and the sourcing is a big part of it. The sourcing and papering are harder than the actual analysis, I think.

Tobias Carlisle: So, I’ve noticed on your website, the 507 website has a way that you can submit your claims. You can submit some distress… Do you get any leads that way? How do you source it?

Thomas Braziel: How do you source it? [inaudible 00:40:05]. I really believe that there are opportunities everywhere. On one level you need to be focused because you’re trying to work on your ideas and do deep meaningful work on whatever you’re researching, but on another you need to have open, your antennas up always. You’re walking by a construction site and you’re like, ‘Huh. These guys haven’t been here you for two weeks. I wonder why construction has stopped. Google the address. Oh, there’s a work shut down because it was, I don’t know, some issue, they ran out of money. Oh, they ran out of money. Did they file for bankruptcy? I’ll Google lenders. Who were the actual investors? Maybe there’s an opportunity here.’

Thomas Braziel: Once in New York, I was walking by, basically, a parking lot that they had turned into an outdoor shop, thing mall, but it was all very slap dash. They got shut down by the city because they weren’t following all these ordinances. You can’t just start setting up shops, you have to have all these codes in place. All these renters now had potential claims against the landlord. I’m like, ‘Oh. New York City real estate. Claims against New York City real estate. I like that idea.’ I tried to get in touch with some of the shop owners. It was very small stock, you’re talking about people that were owed like $10,000 and stuff like that, but that’s an opportunity.

Thomas Braziel: I really think that you can read the paper, you can connect in with professionals in the space, of course, is great. Just like in the same way that you find stock ideas, you’d want to connect them with emerging managers and people that are doing good work. You’re just like, ‘Hey, what are you working on? What are you working on? You following anything? Tell me about your good stuff.’ That’s great.

Thomas Braziel: The same way with us. It’s like, ‘Hey, what are you working on? What’s too small? What’s too weird? What can’t you do? We’ll look at it.’ Network is super important. Of course, literally just reading the paper and trying to follow the stress opportunities that way. Those are really the two primary things. You very rarely get inbound stuff, although you do once you start getting your name out there, you do get inbounds. That’s reputation and really network. You know Facebook ads or Google ads for inbound transactions.

Tobias Carlisle: There was a company in Australia or was just a website, I forget the name of it, but the idea of it was if you got close to tax time and you had these companies that had been delisted. I think it was called delisted.com, it might still be there.

Thomas Braziel: Oh, I love this idea. [crosstalk 00:42:38]

Tobias Carlisle: Yeah. No, no, no. It’s even less than that.

Thomas Braziel: That’s a great idea.

Tobias Carlisle: They said you pay us $250 filing fee and that included whatever, we’re just going to pay some nominal sum for your shares and you transfer them to us. The advantage for you is you now have locked in your taxable loss for the end of the tax year, so now you can make a claim. Often what happens with these things is they just go into this, not in terminal, but they go into these very long, like you’ve said before, two or three years and you want to be able to make your tax claim as soon as you possibly can, time value of money.

Tobias Carlisle: I often thought, that is a great way to collect a whole of this equity. I’ll bet that 95% of it is totally worthless and I’ll bet that 5% of it actually pays off.

Thomas Braziel: Yup. We need to buy that business. We have an idea right there. There’s an idea. Let’s call those guys and see if they want to sell and/or replicate. If they don’t want to sell, that’s easy, we’ll just replicate their business.

Tobias Carlisle: You don’t need to replicate it in the .com that [inaudible 00:43:42], you replicate it in the .com.

Thomas Braziel: With interactive brokers, who I love dearly, so I won’t say anything bad about them.

Tobias Carlisle: So do I.

Thomas Braziel: I’m from the South, we only say things nice about people. When you have stocks like that, you can sell them to them for a dollar, which I always think it’s fun. I’m always like, ‘Oh. What’s on the other side of that trade?’ In general, there’s some guys in the bankruptcy space who have done something similar like that with corporate assets, where they’ll basically buy a whole corporate and assets for nothing, like $5,000. Nothing in the sense of like if you bought a whole portfolio and you had millions of dollars, at least. I mean, they crushed it. That was such a great idea.

Thomas Braziel: It’s that same idea of buying really, really, really optionality and again, more than 80, I don’t know what the percentages are, but a lot of it is trash. For them, there’s a lot of what’s called escheated property, which is basically unclaimed utility bill, meter returns and refunds and things that come to corporations that have tons of locations. Then, they got Visa MasterCard litigation and those assets, which is great. Yeah.

Tobias Carlisle: What’s your overriding philosophy? I think that there are two principles. One is that you’re prepared to look anywhere. You’ve got to be very open to where you could find any of these possibilities. The other one is… Well, maybe there’s three. The position is very important. You want to be in the right place to make sure you’ve got some leverage or you’ve got the payoff, you’ve got some return possibility. The third is just to be alive or aware of the possibilities for that optionality where you could have a very large payout. Then, to sort of-

Thomas Braziel: Buy a steak, get the sizzle for free. That’s it. That’s all investing is. Buy a steak, get some sizzle for free. I think that there’s a lot of steak out there, where it’s just steak, I mean there an’t no sizzle coming. I mean this is kind of a beaten up company and the returns on invested capital are super low. You could make money doing it, especially the portfolio and whatnot, but the really interesting ones are where you can kind of get some sizzle along with the steak. The steak is the price. It’s all price driven. If you have, again, crypto distress is interesting because you’re getting distressed pricing and you’re getting a real steak because you’ve got a state value above what you’re paying. Again, it’s very price dependent. Then, you get this big sizzle for free.

Thomas Braziel: You can say the same thing in a lot of… You buy a liquidation, you get some lawsuits for free, that’s great. Again, steak and sizzle. I guess the more technical way to say it is you’re looking for cheap optionality or free optionality or free options and things like that. I think it’s better to not dress it up too much because I guess I’m a quite a revered person, I like to poke around. Yeah. Keep your eyes open for opportunity everywhere and yeah. I do think, though, that cheap optionality is probably the overarching theme if I was really going to… Cheap or free optionality, because you don’t know outcomes, the outcomes you don’t know. I’m very skeptical of people that have top down thematic use on stuff.

Tobias Carlisle: How many positions do you have in the portfolio at any one time? How much stuff are you tracking?

Thomas Braziel: So, yeah. I used to run an investment firm, which would be capital or a fund. Now, at 507, we’re really just running family office money. We have two really good clients and that’s it. We don’t have a fund. If there’s nothing to do today, there’s nothing to do, which I have to say I love. I love not having to do anything. Not not doing anything like I don’t want to work, but not doing anything… If there’s just nothing that interesting, it’s like you talk to your client, they’re like, ‘Eh. Tom, I don’t know. I don’t think this is that interesting.’ You’re like, ‘Yeah. You’re probably right.’ And you move on as opposed to with a fund, it’s like, ‘Oh, well I got all this money, got to put it to work. I got to keep finding ideas, got to stay on the treadmill.’

Thomas Braziel: It’s interesting you talk about and I think that some of your podcast guests were talking about some of this, which is like doing something different than the herd and all this stuff and I definitely think that’s true. Contrary is so important, but sometimes it’s like we put ourselves in a box as investors because we sort of get trapped by that same… Got to perform every year, got to perform every quarter, got to be diversified by a certain amount. It’s like all these boxes that you’re checking. It’s okay, you can still outperform, but there’s a give and a get there.

Tobias Carlisle: Well, I like that sentiment. I think it’s well expressed, but I think we’re coming up on time.

Thomas Braziel: Oh, man.

Tobias Carlisle: If I just want to get in contact with you, what’s the best way to do that?

Thomas Braziel: You can email me. I think our email is on our website. It’s just tom@507capital.com, and we love inbounds so if someone’s got something really weird that they can’t figure out, or they think is interesting, fill up on it and call us.

Tobias Carlisle: All right. We’ll put links to all of that in the [inaudible 00:49:28].

Thomas Braziel: Good.

Tobias Carlisle: Thomas Braziel, thank you very much for spending some time with us.

Thomas Braziel: Thanks Tobi, cue the music. I love your music, by the way.

Tobias Carlisle: Thank you.

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