Wednesday, September 30, 2009

Sequenom Shake-up

The former Chief Executive of Sequenom Inc., Harry Stylli, is out of a job effective as of Monday, September 28. So are three of the other officers of that biotech company: including the CFO and the head of R&D.

Sequenom, a company based in San Diego, Calif., owns a proprietary DNA analysis platform. (And no, I'm not quite sure that that means -- it sounds like a software system for genetic/diagnostic tests.)

A year ago, shares of Sequenom (Nasdaq: SQNM) were worth more than $21, and the most promising product in its pipeline was a new system for the prenatal diagnosis of Down Syndrome, a system that was said to be both safer and more comfortable (for both mother and fetus) than the diagnostic methods now in use.

Unfortunately, the data for the tests that were underway last year can not be relied upon. On Monday, along with Stylli's departure, Sequenom announced the result of its investigation of problems, specifically mishandling "the protocols and controls for the conduct of studies" on its Down Syndrome screen. This was of course a huge setback, although it had already been largely discounted in the stock price.

The company came under some criticism in the business press (though for reasons unrelated to the Down Syndrome product and its specific difficulties) last October. The price fell from $21 to, by Thanksgiving 2008, about $14. Then it recovered, getting all the way to above $24 in time for the inauguration of a new President.
The inauguration was accomnpanied by optimism in its sector, because the new administration was and is widely thought of as friendly to investment in bio-medical research.

But then the price started to slide, as if the market as a collective organism thought something big was in the offing. The price was back at $14 just before the first official announcement of the data's unreliability in late April -- and the start of the investigation just completed -- then the price bellyflopped immediately to $3.30 a share. It has been flailing along at the bottom of the price chart ever since, although as some life was coming back to the broader market some life seemed to be returning to this stock, too, and it got back to $6.

Then came this annoucement of the results of the investigation and the executive suite shake-up Monday evening, after trading had closed. Yesterday, Tuesday, the stock was back to the mid-spring 2009 prices, between $3 and $4.

Tuesday, September 29, 2009

Switzerland as tax, not sex crime, haven

Switzerland's reputation as a tax haven has taken some hits lately. Or (to put the point positively) its repute as a member of the family of nations willing to co-operate with other nations in going after tax cheats has improved.

Indeed, it was only Friday, September 25, that the OECD promoted Switzerland from the gray to the "white list" of mutually co-operative countries.

Intriguingly, it was only one day later that Roman Polanski tried to enter the country of Switzerland to accept an award and found himself under arrest on sex crime charges dating back to the 1970s.

Is there a connection between the two events other than geography? Consider, whilst pondering this, that the government of the US has a good reason to want to be friends with Switzerland, quite aside from tax revenue. Those Guantanamo prisoners have to go somewhere, and a nice isolated spot in the Alps could be just the ticket. The AP recently said that the Swiss Justice Ministrty is "gathering information" relevant to such a development.

In a related development, the largest Swiss bank, UBS, especially wants to get back into the good graces of the United States after a run-in with the IRS. Could UBS have been part of a back channel deal for Polanski?

I suspect there is more to this arrest than a by-the-book extradition proceeding.

Monday, September 28, 2009

Effect on bondholders

Do the sorts of shareholder activist whom we so often discuss in these entries -- hedge funds that use proxy fights as a way to nake a profit on their minority stock holdings -- have an impact on the bondholders of the companies they fight over? And if so: what is that impact?

This is the question asked by two scholars at the University of Houston: Hadiye Aslan and Hilda Maraachlian in this paper.

The answer seems to be that for most types of bonds and for most types of activist strategies, there is no net effect. For weakly protected bonds, and for the shortest time-horizon variabnts of strategies, there is a negative impact on bondholders.

I just thought I'd put this out there today.

Sunday, September 27, 2009

Allegations Against Saleh

On Wednesday, the SEC accused Reza Saleh of civil fraud. Saleh is a long time close friend/associate of Ross Perot, and on Monday Dell offered $3.9 billion for stock of Perot Systems. The SEC contends that Saleh used his alleged knowledge of the impending Dell bid to buy options in the weeks before that announcement, selling them all Monday for the big illegal pay-out.

A statement from the Perot family Thursday: "Reza has been a close friend of the family for the last three decades, and it troubles them deeeply to learn of these allegations

"He has made many contributions to the various Perot businesses over the years, and the courage he showed as a young man inhis early 20s in helping secure the freedom of the EDS executives held captive in Iran was nothing short of miraculous."

The purchases of these options cost him roughly $477,000. Did he have that much money available in a checking account or the petty cash drawer, or did he take out a loan? In this day of tight credit, a natural line of further inquiry would be: what did the lenders know and when did they know it?

Personally, I hope that inquiry goes unpursued, because as regular readers of this blog are aware I am opposed to the prosecution of insider trading as such. Presumably Saleh's purchases of options drove up the price of those options. Who would have been harmed by this? Anyone with a speculative trading position to the effect that option prices would hold steady or go down. Here's a tautology for you: speculators take risks.

Wednesday, September 23, 2009

Brief Argentinian excitement

The Wall Street Journal reported Monday that there was a deal in the works in which Argentina would re-open a debt exchange deal that country closed in 2005.

Among public-finance wonks this was big news. Argentina is a G20 nation, and is often taken as a bellwether of the other Latin American economies. It also has had a very tumultuous recent monetary history.

Anyway, the deal as outlined in that story would still be big news if it happened, but it now appears that the excitement was premature.

Some history: The 2005 deal was to swap Argentinian bonds for GNP warrants. This meant that Argentina would save a good deal of money by not any longer having to make the interest payments on those bonds. It wasn't such a great deal for the bondholders, because the warrants weren't considered to be worth much, but they figured they'd be worth even less if Argentina should default, so many of them accepted the warrants in a half-a-loaf spirit.

Many bondholders refused to participate in the swap, hoping that they would get a better deal down the line, when Argentina was both willing and able to restore its international credit. The last three years have been good to Argentina (and not just because of the tourist dollars spent by trysting Governors of states of the US, either). This means that those once-spurned GDP warrants are now worth something, and it makes sense that at least some of those closed-out bondholders would want back in to something like the 2005 swap.

But it now seems that this report was inaccurate. If it were true, one would expect the markets in those old defaulted debt instriments to reflect it. Those markets have been unmoved by the report.

Also, a Barclays analyst has put out a report throwing cold water on the thing: "Our final assessment is that the ideas vented by the WSJ are unlikely to be the final proposal made to bondholders and that the process has a long way to go before the decision-makers give a go ahead to a specific proposal that can be seriously evaluated."

well ... the balloon was fun while it was afloat.

Tuesday, September 22, 2009

Three brief items

1. What is the "ethernet"?

A couple of entries ago, I described MRV Communications as a "networking/ethernet company." What does that mean? Networking is the broader term. All computer operating systems nowadays are "networking," i.e. they all support internet protocol at a minimum. "Ethernet" is a more specific term, referring to a particular local-area network (LAN) architecture.

2. General Growth Properties

GGP, the mall operator and a Delaware chartered corporation, remains in bankruptcy court, where it has been since its filing in April, in the Manhattan bankruptcy court.

The case is shaking up ideas about special purpose entities and what is or isn't bankruptcy remote. Walter Kurtz writes that "structurers are quickly moving away from Delaware" as a result of developments in this litigation, and that the Caymans will be their new charterer of choice.

3. Dell offers $3.9 billion for Perot Systems.

Analysts who cover Dell have long said that it was too tightly focused on hardware and should diversify into the software side of the industry. This it now appears intent on doing, by purchasing a company founded by a former independent presidential candidate.

Perot, I'm told, is a juicy target because it has contracts with hospital groups, and any reform of the healthcare system that does come out of this or ensuing Congresses will almost surely include a push to digitize healthcare, which of course means work for Perot. I'll try not to wax conspiratorial here, or even to mutter about crony capitalism.

Monday, September 21, 2009

A Stroll Down Memory Lane with Bre-X

My mind wanders back past out 21st century corporate/financial scadals to one from the final years of the last century -- and the alleged bounty of gold that Canadian company Bre-X claimed it had discovered in Busang, Indonesia.

I re-read recently an article that appeared in FORTUNE in June 1997, by Richard Behar. Behar had visited Busang in the weeks before the fraud was exposed, but as a matter of his good fortune he didn't end up writing a credulous piece about the wonders of the place, the benefits Bre-X and a boom were bringing to the natives, etc. For a variety of reasons he held off on writing, and the scam was exposed in the interim.

Here is the story that resulted from Behar's fortunate procrastination. Writing such a story is rather like taking an exam after peeking at the answers in the back of the teachers' edition of the textbook.

The opening is amusing. Behar tells us how Bre-X vice chairman John Felderhof explained the geology of the (fictitious) deposit to him, that a volcano had essentially "collapsed back onto itself" three million years before, which had created a massive buildup of pressure, which had created the wonderful deposit.

"He drew a diagram. It made sense. After all, he was on his eighth beer of the evening; I was on my fourth."

Wouldn't that make more sense as an explanation of a diamond deposit that as an explanation of a gold deposit? After all, gold is an element (like carbon). Gold is still gold whether it has been under pressure over geological ages or not -- carbon only becomes a diamond under pressure. I think I would have needed more than four beers to make that story plausible. Still, I have proven gullible in my own way, so I can't sit in judgment of Behar.

Although I don't know how it is with volcanoes, I'm sure that salted-mine frauds are bound to collapse into themselves sooner or later. The timing of that event is important, though, and the sooner the better. The longer a fraud goes on, the more it intertwines itself with legitimate businesses, and the more innocent victims there are when everything implodes. In the case of Bre-X, the government of Indonesia has to take a bow (I say this despite being an avowed anarchist) -- for Indonesia insisted that it would not leave the site to be exploited solely by Bre-X. It insisted on a partner, involving Freeport-McMoran Copper & Gold, which then had to do its own tests.

This led to another awkward moment that Behar relates in his story. During his visit to Indonesia, he heard that Freeport was coming into the picture. He naively thought it was quite a coup for Bre-X -- that they'd be thrilled.

"In one of my last meetings in Jakarta with Felderhof, de Guzman walked in. I rose and slapped him on the back, congratulating him on Freeport's emerging as Bre-X's new partner. He should have been thrilled. Instead, he was stone cold. Grim. Icy. He didn't even look at me. It was clear he wanted to talk to Felderhof alone."

Sunday, September 20, 2009

MRV Communications

A networking/ethernet company based in California, MRV Communications Inc., has reported some good news to its stockholders in recent days. The staff of the SEC has completed its investigation of MRV's stock option granst and practices and has decided not to recommend any enforcement action.

Yet MRV continues to face the prospect of a proxy fight at its upcoming annual meeting. Dissident shareholders including Spencer Capital
Opportunity Fund LP, and Boston Avenue Capital LLC have indicated they plan to wage a proxy contest to replace the entire board.

The board, in a letter to shareholders, has characterized the dissidents as a group of Johnny-come-latelies with no long-term interest in the company. "The dissidents collectively own approximately 1.2% of the Company`s outstanding shares, which they only began acquiring in July of this year."

But it assures the stockholders, or the other 98.8% of them: "We are always interested in the views of our stockholders and, in fact, we tried
to reach out to this group on a number of occasions to better understand their
objectives and share our plans with them as to MRV`s future. To date, they have
refused to engage in a dialogue with us about their ideas or objectives and have
refused our invitation to consider some of their candidates in our director
search. What we believe to be true about the dissident group is that they are
trying to gain control of MRV without offering stockholders any premium for
their investment."

Wednesday, September 16, 2009

Target Declassifies Board

Target Corp said last week that at next year's annual meeting it will ask its shareholders to approve a measure declassifying the board of directors, i.e. henceforth requiring that every member of the board seek re-election each year.

The rules change will require approval of those who hold 75% of the shares. Nonetheless, approval of such a request will likely be granted. After all, this is a classic bone of contention between activists and incumbent, with the incumbents stereotypically seeking a staggered board, for the sake of self-preservation but in the name of continuity.

If the board itself is giving up the continuity flim-flam, no 26% of shareholders will insist upon it on their behalf.

Earlier this year, Pershing Square Capital made an issue of the staggered board in its proxy contest against Target.

I see a Reuters story on the subject quotes William Ackman, founder of Pershing Square, thus: "We applaud Target's decision to declassify the board and we believe it will contribute to stronger corporate governance in the future."

Target's incumbents won re-election in late May, as my readers may remember.

Tuesday, September 15, 2009

Daryl O. Anderson

A recent article in the Las Vegas Review-Journal tells us of the latest troubles of Daryl O. Anderson, a veteran of the great CMKM penny-stock swindle.

Anderson was a stock broker at the now-defunct NevWest Securities, which used to sell CMKM stock in the heyday of Casavant and his cronies. Back in the good ol' days, over the four year period 2003-07, CMKM sold $200 million in stock to the public on that public's expectation that such capital would help exploit the diamond wealth of Saskatchewan, Canada. By the spring of 2007, CMKM was a penny stock company with, in essence, no assets and $558 in the cash drawer.

CMKM still exists, but the new management there is encouraging the Dept. of Justice, the FBI, and an IRS task force to "finally issue indictments and commence criminal proceedings" against the the old management.

Anyway, none of this has discouraged Daryl Anderson, who got right back on the horse, as they say in Nevada. The Fort Worth, Texas office of the SEC has recently filed a lawsuit against Anderson for stock scalping involving a company named Cloudtech Sensors. [Stock scalping involves the recommendation of the purchase of a stock while the person giving the recommendation is himself selling it into the market.]

Apparently, this enterprising fellow got forty investors to pony up $3 million total for Cloudtech, which caused a 358% rise in its price, allowing him to cash out his Cloudtech for a profit of $930,852.

My point? Just the age-old one: caveat emptor.

Monday, September 14, 2009

Dialectic Capital Management

I last wrote about California Micro Devices in this blog on August 30. As I noted then, CMD has an annual meeting scheduled for September 17 (this Thursday) and it faces a challenge from Dialectic Capital Management.

The back-and-forth of charge and counter-charge has intensified in the days leading up to the vote, which will determine who is to occupy three of the seats on CMD's seven-seat board of directors.

Last week, CMD alleged that DCM had reneged on a settlement agreement. The company said that the two sides had struck a deal according to which Dialectic would halt its opposition to the re-election of the full board, and that in return for this, after that re-election, CMD would expand the size of its board to none, adding two of the Dialectic nominees.

But, Chairman Wade Meyercord wrote: "To my great surprise and disappointment ... while our lawyers and theirs were finalizing a written settlement agreement, Dialectic reneged on the agreement."

Dialectic has responded that there was no settlement, that CMD has refused to engage in serious negotiations, and that this charge is "clearly a last ditch effort by a desperate Board to maintain its fleeting grasp upon the privileges the directors have so lavishly bestowed upon themselves."

Whoa, dude. Lots of adjectives there.

Sunday, September 13, 2009

The risks of "risk arb"

A couple of weeks ago, the US District Court, District of Connecticut dismissed a class action lawsuit brought against United Rental by hedge funds and other entities who had invested in it back in 2007.

Back in the still-heady days of 2007, Cerberus had represented that it would buy United Rental Inc. (URI), and this led to purchases of URI stock by various speculative third parties, engaging in a practice naturally called "merger arb," or known, sometimes, more ominously as "risk arb." At the time of such an announcement, a target stock's price on the market is generally below the acquirer's bid price -- the difference is known as the "control premium." The risk arb guys, buying the stock on the market, are better that the deal will be consummated as planned, and they can pocket the risk premium for themselves, minus their transaction costs.

Of course there is a very brief window during which that play is possible, because usually there are enough risk-arbers around to push the market price up to the big price well before the deal closes. Sometimes the market price gets above the bid price, which can mean either of a couple of things: somebody is betting that another suitor will appear, turning the deal into an auction; or there is simply a "greater fool" effect at work.

But back to 2007. By November of that year, the folks at Cerberus had troubles. They saw that the credit markets were tightening, and Chrysler -- which they ownesd at this point -- was eating up their cash. So Cerberus pulled out of the UR deal. URI's stock price took a big hit, and the company received liquidated damages.

At least the less numble of the risk arb types took a beating. They didn't take it lying down, though. They brought a lawsuit on the theory that when URI management first received intimations from Cerberus that they might need to "renegotiate" the acquisition, that fact should have been and was not made public. 07-cv-01708-JCH First New York Securities LLC, et al v. United Rentals Inc et al

That is the case that was dismissed last month, on the grounds essentially that the assertions in the complaint, accepted as true for the purpose of the motion, do not entail a strong inferenece of scienter.

This case may be important in the evolving understanding of how scienter must be pleaded under the evolving standards of the PSLRA. But my initial reaction to it was simply: "Man up, wimps! You knew you were taking this risk. That's how the capitalist cookie crumbles." Given that simple unsophisticated reaction, I have to give the court in this matter three cheers.

Wednesday, September 9, 2009

CNS Response

The CNS/Brandt saga continues. CNS Response is a California based company that develops software designed to analyze a patient's brainwaves.

You may remember that back in July there was some excitement when the company's former CEO, Leonard Brandt, purported to call a spaecial shareholders meeting in a hallway outside of a closed office door in Dover, Delaware.

Now there's a new installment of the soap opera. Brandt -- who, BTW, is a current director of the company as well as its former CEO -- called another meeting for the Friday before Labor Day weekend and the company says that this one didn't count either.

Gee, this sounds like an operation that has its act together. I'd surely want to invest my money with them!

Meanwhile, while you and I make our portfolio decisions, the family feud is in litigation before Delaware Chancery Court as explained in this 8K.

Tuesday, September 8, 2009

Cadbury and Kraft

Kraft Foods has offered to buy the famous confectioner Cadbury PLC in a part cash, part stock swap deal valued at $16.73 billion (which is 10.13 billion GBP).

Cadbury's management has rejected the offer, saying that it "fundamentally undervalues" the company -- which strikes me as an odd thing to say, since the offer is at a 31% premium on the closing share price of Cadbury Friday.

Trian Fund Management, a hedge fund manager controlled by Nelson Peltz, owns 3.5% of Cadbury, a stake Peltz accumulated back in 2007, and Trian has played a big role -- bigger than the size of that stake would indicate -- in Cadbury's management decisions before, notably in pressing for the spin-off of the Dr. Pepper softdrinks business.

Trian also, intriguingly, owns a stake in the suitor company in this scenario, Kraft. There, too, it has played an activist role, getting two Peltz-approved independent directors on the Kraft board in November 2007.

My guess, then, is that we will be hearing from Peltz if this turns into a protracted struggle for control of the chocolatier.

Monday, September 7, 2009

Enjoy Labor Day

No, I'm not going to labor on a entry today. And in fact, this brief note was composed yesterday. I think I'll set it to post at, oh, 1:11 AM. Wonder if there's any mystic significance to that?

I'll have something to say about fights for conrol of the corporate suites when the shortened workweek gets underway.

Sunday, September 6, 2009


There was a decision by the Second Circuit Court of Appeals Wednesday, Sept. 2, that may be heartening to long/short equity funds, short dedicated, etc. The question it helps answer is: "When might market makers and hedge funds receive compensatory damages from lawyers for the parties who bring lawsuits against them on claims such as 'naked short selling'?"

A lawyer who has become something of a short-sellers' nemesis, Wes Christian, has been sanctioned on connection with a lawsuit he filed against Knight Capital, the market maker, along with a collection of hedge funds and individual traders. He represented issuer ATSI, and alleged stock manipulation by Knight Cap and the others.

The district court dismissed the complaint with prejudice in February 2005. Defendants then moved for rule 11 sanctions against the attorneys involved. The district court agreed and imposed sanctions in March 2008 on the ground that the attorneys "lacked any reasonable factual basis" for bringing the suit. Crucial to the precedential significance of this is: the district court imposed sanctions of close to $70,000 without making a specific finding of bad faith.

On appeal to the 2d Circuit, the issue was whether sanctions against a lawyer in such a matter should be applied by a subjective or an objective standard, i.e. whether a finding of bad faith was required.

The court answered that question in favor of an objective standard, upholding the imposition of sanctions, although remanding for reconsideration of the amount.

Wednesday, September 2, 2009

Hudsucker Proxy

The Hudsucker Proxy is a 1994 movie about ... well, struggles for power in the corporate suites.

The Coen brothers produced this movie, on the strength of their previous big hit, 1991's Barton Fink.

Hudsucker stars Paul Newman as a scheming corporate executive who sees opportunity when president Waring Hudsucker, played by Charles Durning, commits suicide in a startling opening scene.

Newman's character figures he'll install a dunce in the office of president, the stock price will tank, and that will make takeover easy. Of course, it doesn't work out for him, because the new president (played by Tim Robbins) invents the hula hoop.

Just waxing nostalgic, because it is easier than work. Which I had better get back to now.

Tuesday, September 1, 2009

Fiduciary Duties

Now THAT's a title line that always gets a lot of hits.

Regardless, I'm referring to an article that appeared in the Stanford Law Review last year under the full title "Fiduciary Duties for Activist Shareholders," by Iman Anabtawi and Lynn Stout.

The question they raised is: do activist minority shareholders in publicly listed companies have fiduciary obligations? "We believe fiduciary duty doctrine can and should be interpreted in a new way that takes into account changes in the corporate landscape and reaches such opportunistic behavior. Indeed, we believe that the law of fiduciary duty is uniquely suited to address the growing problem that opportunistic shareholder activism poses for corporate governance."

Sounds to me like high-falutin' language for a new tool that will let management entrench itself. Now, if you challenge them, they'll cook up a charge that you aren't a good fiduciary. An ivory-tower idea that could, like many ivory tower ideas before it, do a good deal of harm if unleashed in real world circumstances.