Chapter 32: Setting Things in Motion

November 29, 1982, Chicago, Illinois

On Monday morning, I was up early and headed for the offices of Hart-Lincoln, which were just a block south of the Hancock Center.

"Jonathan Kane to see Nancy King," I said to the receptionist, a cute redhead.

"She's expecting you," the receptionist replied. "If you go through the door to my right, she's in the office at the end of the hallway, on the right."

"Thanks."

She buzzed me in and I walked down the hallway to the last office on the right, which had a nameplate which read 'N. King, Associate'. I rapped lightly on the open door to get the attention of the brunette who was facing away from the door, reading with a red marker in her hand. She turned, stood, and smiled.

"You must be Jonathan," she said.

"I am. And unless you're in the wrong office, the nameplate indicates you're Nancy King."

"Come in and have a seat on the couch, please."

I did as she asked, and she picked up a yellow legal pad and came to sit on the couch as well.

"Nelson tells me you've just obtained your securities license. Which one?" she asked, her pen poised over her legal pad.

"Series 3," I replied. "I'll be taking the Series 7 exam next week."

"Have you been trading?" she asked, as she began to take notes.

"Only for myself," I replied. "I have a small portfolio at Spurgeon I manage for myself. As of today, though, I'll have permission to manage a private portfolio for a select group of friends and family, and I'll be managing a trust fund for a friend."

"Do you have specific concerns?" she asked.

"Mainly that I structure things properly to take best advantage of the tax laws."

"Is your portfolio fund structured as a partnership? And will you have significant investment?"

"Yes. I'll have my entire portfolio in my fund, except that portion that I'm required to have in the Spurgeon Select fund."

"What percentage is that?"

"Do you mean of the portfolio I'm going to manage or of my funds?"

"Your funds."

"Taking into account gains, right now it's about 50/50. A portion of any bonuses paid has to be invested in that fund, but the rest will go into the fund I'm managing, so the majority of my holdings will be in my fund."

"Does it have a name? It'll be easier if we can just use the name."

I had thought about it, and decided based on other names used at Spurgeon, that 'Cincinnatus' was the best option.

"The Cincinnatus Fund," I replied.

"OK. I'm sure Spurgeon will structure the fund properly with regard to domicile and to allow you to take advantage of the favorable tax treatment for carried interest. Do you understand that?"

"Yes. Domicile is the Cayman Islands to ensure proper tax treatment for pension funds and the like. All Spurgeon funds are domiciled there. As for carried interest, I understand it treats my fees as capital gains, and they aren't realized until I actually take money out of the fund. I plan to structure the fund with an income component, which will allow me to withdraw cash without having to sell securities to avoid the potentially taxable event for the other investors."

"I'll need to see the documents used to create the fund," Nancy said. "And I'll want a list of your investors. How many are you permitted to have?"

"Ten. I can get you copies of the forms today. I'll drop them off once I receive them later this morning. I don't have my complete list as yet, but I'll create that and send it along with the documents."

"I'd also like to see your last two tax returns. You're going to see a significant increase in income, and it's better I have a complete picture of where you are right now. Also, I want to see your monthly portfolio statements and all your trade confirmations."

"OK."

"Do you own any property?"

"No, but I plan to buy a house sometime next year, perhaps as early as February, but more likely in April or May. My plan is to live there for three or four years, then buy or build something bigger. I'd retain the house and rent it out."

"Do you plan to buy more real estate to lease?"

"Possibly, but that would be in the future."

"OK. We'll talk about the best structure for that in the future. I assume you'll have a mortgage?"

"Yes. Spurgeon will hold the note at an advantageous interest rate."

"I'll want to see those papers as well to ensure they'll pass IRS muster, though I can't imagine Noel Spurgeon not having everything properly structured. Do you own a car?"

"I do. I received one as a gift from a trader at Spurgeon for investment advice."

"You'll owe income taxes on that," Nancy advised. "I'll need to see the paperwork. Do you have a CPA?"

"I'm meeting with my friend's father tomorrow night; he's a CPA."

"What's his name?"

"Robert Black," I replied.

"I know him. We've worked with him before. Once you've met with him, have him get in touch with me and we'll work together on properly structuring everything. He'll help you make the necessary provisions for taxes. Did you make a quarterly payment?"

"No."

"You should be fine, given your income this year will be higher and you'll have at least the amount of last year's tax liability withheld, but you'll want to be careful in the future. Generally, no income taxes are withheld for your fees, though they should be for your commissions, assuming you take those in cash. If you carry them, then they might qualify for favorable tax treatment, but I'd need to verify."

"I plan to have my commissions paid out, at least for the next year, as I'll use that money for a down payment on a house, among other things."

"OK. You mentioned a trust fund?"

"Yes. It's structured as a trust, and I'll get the trust documents tonight. I can courier copies of them to you tomorrow."

"Please give me a week to review the paperwork, including your tax returns, before you take any payouts."

"That won't be a problem, as it will take a week to ten days to transfer the money and stocks, and commissions are paid quarterly, six weeks into the following quarter."

"So your first commission check would be mid-February?"

"Correct. And the first set of management fees would be due on December 31st of next year, and I plan to carry those."

"Then I think I have what I need until you get me the paperwork. Make sure you take copies of your tax returns to your meeting with Bob Black. He'll want those on file. Oh, before I forget, he and I will both need copies of your employment contract with Spurgeon."

"Officially, I'm still mailroom supervisor until the last day of February."

"Your actions as a trader or money manager would be governed by those terms, even if you aren't officially in the position."

"I'll get those to you as well."

"You can just drop everything off tomorrow in a single packet. I won't have time to review anything today."

"I'll do that, then."

"Any other questions for me at this time?" she asked.

"No."

"Is Nelson your attorney of record?"

"Unofficially," I replied.

"You should make that official and have him on retainer. That simplifies things for you as you can simply refer people to him without having to call to set it up."

"Why do I see money flying out of my wallet like a flock of birds?" I asked with a grin.

"Think of it as insurance. I believe you'd much rather pay us that than the IRS, or worse, SEC fines."

"Both of those would put my job at risk."

"You follow the trading regulations and Nelson, Bob, and I will ensure you are OK on the tax side, along with providing general legal advice. I assume you have access to the Spurgeon legal team should you need it."

"That's correct."

"Anything else?"

"No."

"Then let me give you a copy of our standard retainer agreement. Read it, sign it, date it, and return it with a check for $1000, which will apply to either my work or Nelson's work. We'll charge against that retainer and let you know when you need to replenish it. This consultation is at no charge."

She slid the sheaf of papers to me.

"Thanks," I said. "I appreciate the help and advice."

"You're welcome."

She stood, so I followed suit, we shook hands, and she walked me to reception where I bade her goodbye and got into the elevator. Less than ten minutes later, I was on the 29th floor with my hardhat on, speaking with Marcus.

"Any concerns?" I asked.

"No. We're on target. The real question is the furniture, but you've said that's scheduled to be delivered on time."

"So far," I replied. "How was your Thanksgiving?"

"Good. Yours?"

"Good as well. I'll get out of your hair. Call if anything comes up."

"You know I will!"

We shook hands, and I left, heading up to the mailroom on 30. I was a bit early, which gave me twenty minutes to work on a spreadsheet to track my new fund without taking time out of my normal workday. I didn't clock in until my normal starting time, so as to not create a potential problem for Mr. Nelson.

"How were things on Friday?" I asked Jack when he arrived just before 8:00am."

"Quiet. Most of the Suits were out, except the overnight guys who work the Asian markets. No problems with any of the technology or office equipment. How was your Thanksgiving in Ohio?"

"Good. I saw Bev and met my mom's boyfriend."

"That has to be weird."

"Not really. It's her life and I'm happy for her. It's not like I'm interviewing for a dad after twenty years of not having one."

Bob and Sandeep came in and, after greeting them, we all got to work. The morning was routine and busy, and just after 11:00am Anna called to let me know she had the completed paperwork and I could pick it up at any time. I did that on my lunch break, and then used the copier machine on 30 to make copies of the documents, which I would pay for. I checked with Mr. Nelson and he approved the phone call I needed to make to Bill Wyatt.

"What's the soonest you would be able to close on a house?" Mr. Wyatt asked after I identified myself.

"Given I can't get the subsidized mortgage until after March 1st, that would be the absolute soonest I could close. Why?"

"There's a house that was listed last week that popped up on the MLS on Friday. It's exactly what you're looking for and in the price range you provided."

"There is no way I could close before March," I replied. "Is the owner going to wait four months?"

"You never know," Mr. Wyatt said. "I think you should look at the house, because sales are tough in December and January. If you like it, and it's still on the market mid-January, you could go for a sixty-day closing."

"I could see it on Saturday morning," I suggested.

"Let's plan for 10:00am. Let me give you the address."

He did, I made a note of it, then thanked him and hung up. It was awfully fast, but if the house was what I was looking for and didn't sell before mid-January, then it would be an option. My lunch break was over, so I walked back to the mailroom. The afternoon was busy, and at the end of the day, after I clocked out, I used my AT&T calling card to call Bev.

"What did the attorney say?" I asked after we greeted each other.

"He actually referred us to an expert in child custody who works in Cincinnati. We're meeting with him tomorrow afternoon. He has to review the court filings and the previous rulings before he can tell us anything firm. At the court date, the judge will tell us the next steps."

"Then I'll call you tomorrow to find out what the attorney says, OK?"

"Yes. Talk to you tomorrow!"

We said 'goodbye', I hung up, then went to the break room to hang up my jacket and put on my hat and coat. I made my way to the freight elevator, rode it down to the lobby level, and left the building to walk to Morton's to meet Jeri for dinner. She was waiting for me in the lobby, and greeted me with a quick hug. We were seated immediately and ordered Cokes.

"I have the forms you need to fill out to execute the transfer of your trust to Spurgeon. The Trustee will need to sign them and they'll need to be notarized. Until you're eighteen, your other funds will have to be in my name unless you want to get your parents to sign the forms."

"No, it's OK to keep the funds mingled," Jeri said. "The Trustee signature is easy, and I'll get that done tomorrow."

"OK. Just remember, you're giving Spurgeon complete power of attorney over the trust investments, with me as the manager."

"I understand that," Jeri replied. "I don't have control over the investments now, so that's no different from how it is now. What are you going to do with the commission?"

"Buy a house," I replied.

"Where?"

"Rogers Park, most likely. Or that area, because my roommates are Loyola students. When the time comes for something bigger and better, I'll rehab it and rent it out. I'll do my best to diversify into real estate as well as other instruments."

"An REIT?" Jeri asked.

"I won't be licensed to do anything like that. If I wanted to set up something like that, my uncle would have to manage it for me. But one step at a time. I'm not ready to become a slumlord just yet!"

Jeri laughed, "I can't see you as a slumlord! But I understand what you're saying. The thing is, I'm a pretty good judge of people and you have what it takes to make it big. The same is true for Nelson and Gary; I'm less sure about Marcia."

"Why is that?" I asked.

We were interrupted by the waiter bringing our Cokes and asking if we were ready to order. We both knew what we wanted, so we ordered, and the waiter left the table.

"Marcia," I prompted.

"I got a bad vibe during our last get together. She was really tense and I'm reasonably sure I know why. If what I surmise is true, then she's not the right person for our group."

I wondered if Jeri actually knew, or was fishing, so I decided to just ignore her supposition and confirm I'd noticed the same thing.

"I noticed she was tense and uptight," I replied carefully. "But people have bad days, so I'm not sure I'd read too much into it."

"In my mind," Jeri said, "there's no room for emotion in our group. To achieve our goals, we have to be completely focused on them and be logical, practical, and unemotional. Those are the primary characteristics for a good trader, right?"

"Yes."

"The same is true for attorneys and for political operatives. Granted, sometimes an attorney needs to express emotion to the jury or to the press, but not when he or she is analyzing a case or writing a brief. Nelson and Gary are both like you and me; Marcia isn't."

"I think you're being a bit hasty," I countered.

"What would your boss do if you made an emotional decision about a stock that lost significant money for a client?"

She had a point because there was no doubt in my mind that Murray Matheson and Noel Spurgeon would not tolerate that kind of trading, and losing money for a client was a quick way to be out of a job, especially if it was based on emotion rather than steely eyed, cold-hearted analysis.

"He certainly wouldn't be happy," I replied.

"You'd be fired. There's no two ways about that. Analysis gone wrong is one thing; emotions are a very different story."

"A reasonable point, but we're not investing or trying cases or whatever."

"No, but we're going to rely on each other for analysis and advice, and we can't have someone who can't check their emotions at the door, or better yet, doesn't respond emotionally except in the most extreme situations."

"Isn't that asking a bit much?" I inquired.

"Would you want an ER doctor to be emotional?"

"No, but..."

"Seriously, Jonathan, this is an important point."

Jeri was interrupted by the waiter bringing out salads.

"OK, but don't you think having an aide to the new Mayor would be important? I think Congressman Washington has a good chance of winning if State's Attorney Daley makes it a three-way race."

"Actually, less valuable than working for a congressman," Jeri countered. "Sure, the Mayor is powerful in the city, but you're going to be more concerned about national and international policies and information."

"And when Gary is out of a job because Mayor Byrne loses? How is that any different?"

"This isn't public, but he's going to work for Senator Alan Dixon as Deputy Chief of Staff in January. He'll hand in his resignation on Friday."

"Will he move to DC?"

"No. The Chief of Staff works in DC, but the Deputy Chief of Staff works in the Senator's office here in Chicago."

"In this situation, I think I'd speak to her before she was excluded."

"I don't think she's going to be comfortable in the group," Jeri observed.

"At least give her a chance to explain and an opportunity to stay. We aren't in an ER or courtroom, and lawyers and doctors train for what they do for at least seven or eight years, and then are supervised by senior lawyers or doctors. It's not as if she gave us advice based on emotion."

"You're working awfully hard to keep her in the group."

"No, I'm asking you to reconsider acting based on one incident about which you only have conjecture, not knowledge."

"But you know for sure, don't you?" Jeri asked.

"I won't answer that," I replied. "I might or might not, but I'm not going to speculate. You should speak with Marcia."

"I'll think about it. Changing topics, would you come to the house for dinner on my birthday? It's a Sunday."