Monday, November 30, 2009
Pittman was with Bloomberg News. He was part of a team that won the Loeb Award last year for a five-part series in the financial crisis.
He also did pathbreaking work on Goldman Sachs' interest in the AIG bailout, Hank Paulson's role in creating the subprime mess, and the irresponsibility of the ratings agencies increating the conditions for its spread. In June 2007 he wrote a very detailed and incisive piece about the credit agencies that holds up well even with the benefit of 2 and 1/2 years of hindsight.
Felix Salmon, usually a quite astute guy, criticized Pittman for that story, and now regrets that.
Pittman was an old-school reporter, a native of Kansas City, whose first job was covering police for the Coffeyville Journal in southern Kansas in the early 1980s. Later he was at the Times Herald-Record in Middletown, NY, for twelve years, joining Bloomberg in 1997.
The obits I've seen are not very forthcoming about the cause of death, except that it was heart-related. Regardless: it is a loss.
For more, go here.
Sunday, November 29, 2009
Within its portfolio there is Dubai Ports World, the third-largest port operator on the globe, and Nakheel, a real estate developer associated with the Palm Islands.
- Wednesday, November 25, the government announced that the company "intends to ask all providers of financing to Dubai World and Nakheel to 'standstill' and extend maturities until at least 30 May 2010". Thus "standstill" includes payments due for next month.
- Thursday, November 26, the US markets were closed for Thanksgiving. Asian markets took a hit on the news, though, in the wake of reports that some of Japan's bigest banks were heavily exposed to Dubai World.
- Friday, November 27, Markets in the US started down big, but seemed to discount the significance of thre news as the day went on.
- Saturday, November 28, The National, an English language paper based in the United Arab Emirates, reported that Dubai World "could still meet the December 14 deadline on the US$4 billion ... payment of a sukuk from Nakheel under one option being considered by advisors to the conglomerate." It is also considering an 80% redemption offer.
Today, the UAE's central banks is making reassuring noises about "standing behind" that country's banks.
One intriguing feature of the situation involves the sukuk bonds involved. Any default, or lesser "credit event" here will compound some of the uncertainties I discussed on May 19 in this blog.
Wednesday, November 25, 2009
As you'll remember, and we chronicled here, on November 16, Overstock filed with the Securities and Exchange Commission an "unreviewed" Form 10-Q for its results in the quarter that ended September 30. It claimed that it had had to dismiss its auditor, Grant Thornton, because of a sudden change of heart on the part of Grant Thornton as to how a certain matter should be treated.
Specifically, it seems that the key to the dispute was the account of a particular "fulfillment partner." Often, when you order a product through Overstock's website, you are not buying it from Overstock, but from a third party, a business looking to unload its own inventory, and using Overstock as the cyberspace go-between for this purpose. Overstock has said that it accidentally overpaid one of these partners approximately $700,000 in 2008, and the partner informed it of this in February of this year. So ... doesn't that mean that the partner is acknowledging a debt, and that this debt is an asset (an account payable) that should be reflected as such on Overstock's books?
If so, then since the overpayment occurred in 2008, the account payable was an asset as of December 31, 2008. Overstock decided not to treat it as such, but to treat the later payment of $785,000 from that partner (principal and interest?) as part of its acknowledgement of the receipt of one-time non-recurring income of $1.9 million. That involved lumping the $785,000 in with certain other matters we won't trifle with here.
According to paragraph 7 of this press release, which is worth quoting in full because it has now become the crux of the controversy: As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q's for those quarters. Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, "No." In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.
Then, somehow, in November Grant Thornton changed its collective mind and decided that the account at issue should have been recorded as an asset in 2008 after all. Grant Thornton then reportedly gave Overstock an ultimatum: restate your 2008 results accordingly or we won't sign off on your third quarter filing. That's why Overstock fired them and, insteads of simply letting the clock continue to run while it searched for a new auditor -- filed the now notorious unreviewed 10Q. Of course, that clock is still running anyway, because they are out of compliance until they come up with an audited one. This filing remains bizaare.
But the new twist to the tale is that on November 20, (Friday, around the time Overstock was revealing that Nasdaq might de-list them), Grant Thornton LLP sent a letter to the Securities and Exchange Commission giving its own account of the story behind Overstock's recent 8K.
The short summary would be: "They are lying about why we left, and we left because they were lying before that." They say that (contrary to paragraph 7 as quoted above) they were not "repeatedly asked" throughout 2009 whether the treatment of this money was proper, and they never signed off on it.
"We disagree with the Company’s statement in paragraph 7 'that upon further consultation and review within the firm, Grant Thornton revised its earlier position' regarding the previously filed 2009 interim financial statements. This statement is not accurate. The Company brought the overpayment to a fulfillment partner to Grant Thornton’s attention in October. After additional discussions with the Company, the predecessor auditor and receipt of additional documentation from the Company we determined that the Company’s position as to the accounting treatment for the overpayment to a fulfillment partner was in error."
Sam Antar makes the case, not for the first time, that what is going on here is the maintenance of a cookie-jar reserve. Antar knows fraud, having committed more than his share of it. On his account, he's now trying to stay out of hell. Theology aside, I think the case he makes is worthy of the the SEC's full attention.
The whole affair continues to have the odor of Refco's hide-the-loan scheme, which unwound four years and one month ago. It looks so far like a low-rent variant of that, but it does not look good.
Tuesday, November 24, 2009
Between late August and early October, presumably in some part due to this buying, the price of IMMR rose from $3.75 to $5. It peaked there and headed down again, though, and was back down around $3.75 at the start of this month. In the last three weeks, there has been a rebound, so that at the close of business Monday, Nov. 23, the price of the stock was $4.12.
Instead of trying to give meaning to that zig-zag, I'll move on to another example of Remius' tech buying. They've bought the stock of PC motherboard manufacturer Phoenix Technologies Ltd. (NASDAQ: PTEC). Ramius has added 535,535 PTEC shares to its current holdings, for a total of shares outstanding of 13.4%. Ramius offered to buy PTEC in 2007.
PTEC's stock price took a tumble in mid-October when it announced said its fourth-quarter results. The net loss widened to $5.02 million from $4.57 million in the prior year period. Thomson Reuters had polled three analysts and on average they expected the company to report a loss of $0.06 per share for the quarter. They actual loss per share was $0.15.
Just some wonkish facts for the day. Look for significance elsewhere.
Monday, November 23, 2009
Well ... maybe not. Alan von Altendorf suggests that there is some controversy about these simple-seeming terms.
Altendorf begins with the fact that the SEC has two new regulations coming into effect on January 1, 2010, that bear on this matter: S-K and S-X.
I'll skip down to page 7 of the PDF for you: "The new SEC rules are a joke and
professional explorationists know it. Very few will speak out about it, because there was a wave of computer automation and black box software to cover up and gloss over the shortage of experienced oil & gas geoscientists."
Who is Altendorf? The principal of CWSF, an independent oil consultancy out of Houston. I know nothing first-hand about him, but normally reliable folk think he's a bright guy who knows the field. It which case, the new rules may just be a cover for fraud and very bad news.
Sunday, November 22, 2009
Why is it so much easier, so much more common, to be nervous as a passenger on an airplane than to be nervous driving one's own car? The latter is more dangerous, but while driving the car you feel that you are in control of your fate, whereas while a passenger on a plane (or a bus for that matter) a perfect stranger has control of your fate. Owners of equity naturally want to drive the car.
One of the counter-arguments to shareholder democracy, or any very direct expression thereof, is that many of the shareholders have a very short-term perspective. They don't intend to maintain the car properly, so to speak, because they plan to sell their interest in it after one quick trip. Managers and directors with a more long-term perspective are to be trusted. As are the institutional investors typically in for the long haul, like pension fund managers.
These theories and arguments collide directly in the emerging bidding war for Cadbury. Look for example, at a story Andrew Ross Sorkin of The New York Times recently published, "Do Stockholders Really Know What's Best?".
The money quote from Sorkin, "Indeed, one parlor game in London has been to guess how much of Cadbury’s long-term shareholder base has already sold out to arbitrageurs, whose goal is to see the company sold as quickly as possible and then move on to another deal .... People involved in the deal estimate that about a third of the shares have already changed hands, moving from long-term shareholders to hedge funds. Those funds, said Joseph Grundfest, a professor at Stanford Law School, 'have a long-term time horizon of about 12 minutes.'"
Frankly, such an appeal leaves me cold. After all, every completed transaction has two parties. These short-termers have bought up a lot of stock from the institutions with longer-term horizons that used to hold it, you say? Why have those institutions sold it? Because, in whatever temporal horizon interests them, some other investment looked better, right? They sold to get the cash to put that cash somewhere else.
When and why did Cadbury cease to be an attractive place to have their assets for those long-termers? We can hardly blame that on the short termers who (this is inherent in this diagramming of the situation) hadn't bought yet.
I don't know what Cadbury's fate is going to be. But it seems to me that arguing that it ought to remain an independent company forever because that is the long-term best thing to do, because only short-termers buy stock is just ... well, silly. People who 'reason' that way should put the chocolate down and try some brain food.
Wednesday, November 18, 2009
Yet it will only be a mention: a sort of IOU. I write-and-run. Landry's stock rose dramatically after Pershing Square announced its opposition to the CEO's efforts to take the restaurant company.
The chairman of Landry's Tilman Fertitta, proposes to take the company private in a $14.74 per share buyout. This means in essence that Fertitta wants to work for himself and a group of friendly known investors, not for the every-shifting multitudes of public shareholders who are always buying and selling stock. And not, presumably, for Bill Ackman.
Pershing Square says in a filing last week that it has economic exposure to more than 3.8 million of Landry's outstanding shares, or 23.7%.
"The reporting persons do not intend to support the transaction," it also says. Fertitta had been attempting to take Landry's private for nearly two years, going back to a January 2008 offer of $23.50 a share.
The $14.75 deal values Landry's at $238 million.
Tuesday, November 17, 2009
A tip of the hat to Overstock-news-junkie Gary Weiss here. As Weiss points out, even Bernie Madoff had "some accountant somewhere" who would review his filings. But Overstock files this quarter without an auditor review. And it opens up its press release on the subject by quoting Nietzsche: "All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."
I'm getting a Refco-in-October-2005 kind of vibe about Overstock right now.
You may remember that the first time the naive portion of the world learned that there was anything wrong at Refco it was Monday, October 10, 2005, when Refco announced that through an internal review over the weekend it had discovered a receivable owed to the company in the amount of approximately US$430 million.
That struck many people as a rather strange thing to suddenly 'discover' and the stock price started tanking.
Over the course of that week, further revelations came out. I won't go into them now because I have no reason to believe they are useful to the analogy. But the gist of it is, the initial market sell-off was more than justified by the underlying facts. Only one week later, Refco filed for chapter 11 protection.
I'm not saying that the same will happen here. I have no idea. And Overstock's argument with its (former) auditor, Grant Thornton, seems to have involved a matter quantitatively much smaller than the sum involved in the news that broke on October 10, 2005. But this has that feel -- a bit of accounting-matter weirdness that is sufficiently unusual that one suspects there is more to it. Overstock made this announcement after the markets had closed (check the PR Newswire announcement to which I linked you above -- it gives the time of release as 5:35 EST Monday.)
The market will make a judgment soon enough.
Monday, November 16, 2009
I've just discovered a press release in which the prominent law firm Bingham McCutcheon crows about these results. It tells us that its partners, David Robbins and John Filippone, assisted by associate James Parker, represented Shamrock Activist Value Fund, L.P. in this matter.
Personally, I'm not at all clear about what those three gentlemen did. Did they give advice? Was there ancillary litigation in which they made themselves useful?
There are lots of documents to be drafted in the course of a proxy fight. And of course there are complicated documents that govern the relations among the Shamrock entities and between them and their underlying investors. So there is plenty these gentlemen might have done. I just wish the release they put out had been a little bit more explicit.
Sunday, November 15, 2009
Dick Fuld, I'm guessing, is reading both. He's the former CEO of the now defunct broker-dealer Lehman Brothers, and Time magazine gave him a spot on its list of "25 People to Blame for the Financial Crisis," here.
Both Sorkin and Gasparino give an account of a certain dramatic incident in Fuld's rise up the corporate hierarchy at Lehman, from his days as an impatient young trader. Here is Sorkin:
One day he approached the desk of the floor's supervisor, Allan S. Kaplan (who would later become Lehman's vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signalling loudly that he was ready for Kaplan to do his bidding.
Kaplan, cupping the receiver with his hand, turned to the young trader exasperated: "You always think you're the most important," he exploded. "That mothing else matters but your trades. I'm not going to sign your fucking trades until every paper is off my desk!"
"You promise?" Fuld said, tauntingly.
"Yes," Kaplan said, "Then I'll get to it."
Leaning over, Fuld swept his arm across Kaplan's desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly, "Will you sign it now?"
A version of that story has been published before, but Sorkin in his notes assures us that his own reporting is responsible for the level of detail with which he tells it. Curiously: Sorkin lets the story expire and moves on to later incidents in Fuld's career -- he doesn't close out that anecdote by telling us whether Kaplan actually signed off on the deal or not. Here it is Gasparino, who gives the matter only four sentences, who is more informative.
Fuld, as most people knew, even early in his career, was among the most aggressive traders at the firm, something he cultivated to bully his way through the management ranks. When the loan officer said he 'needed to clear' his desk before approving the trade, Fuld took matters into his own hands and cleared the man's desk for him -- literally by shoving the papers to the floor.
The officer was stunned, but he approved the trade. And Lehman made money on it.
So never make the mistake of using the expression "I have to clear my desk" while in the presence of a Type A personality.
The compare-and-contrast exercise here is worthwhile, I think. Sorkin gives to Kaplan a bad-guy characterization, so that we understand and even sympathize with Fuld's rudeness. Sorkin for example has Kaplan "deliberately ignore" Fuld when Fuld first approaches his desk. And then he has Kaplan telling Fuld off before he gets to the "clear my desk" remark. For Sorkin, I think, the men (and a few women -- such as Erin Callan, Lehman CFO) at the center of the crisis were facing grave challenges and doing the best they knew how to save their companies in the face of those challenges. Heck, if Kaplan had been more central to Sorkin's story he might not have been fitted for the Snidely Whiplash moustache in the telling of that Fuld-as-young-man anecdote.
For Gasparino ... well, did I mention that his book is named "The Sellout"? He is looking to assign blame. They weren't facing challenges in 2008, they were working through a disaster of their own creation. Since Fuld is a prominent recipient of blame, there is no need even to give Kaplan's name. The story is only meant to show that the Gorilla routine was a deliberately adopted tactic whereby Fuld bullied his way through management ranks.
I prefer Gasparino as a writer, for both precision and concision; I think they both are sadly deficient as analysts, though if I were to write such a book I think I'd adopt something more akin to Sorkin's tone.
Wednesday, November 11, 2009
It seems that Cadbury is actually run by a very eccentric genius named Willy Cadbury, who looks a lot like Gene Wilder. He wants to retire, so he held a contest involving golden tickets.
Kraft won the contest, but now Cadbury wants to pull out of the deal, because the Oompa-Loompas have warned him against the Kraft fellow, in a song that goes something like this.
Oompa-Loompa Dumpety daft
We won't work for this here guy Kraft.
Oompa-Loompa Doopety Doo
If you weren't crazy we'd clobber you.
What will we get will you listen now please?
Nothing but their Macaroni and Cheese.
Whose is the stock that we're going to swap?
It tastes no good without ... cream on top.
Oompa-Loompa Doopety Broom,
If you are wise you'll hide in your room.
Oompa-Loompa Dipedy Daft,
We'll have an ambush ready for Kraft.
Tuesday, November 10, 2009
My own view is that the doctrinal development of patent law in the United States some time ago took a wrong turn. There are just too many artificially created "property" rights erected by bureaucratic decree and judicial laxity, and the result has been the development of a lot of intellectual fences, which have broken up the grazing plains of creativity. [Okay, that isn't a great metaphor. But it's mine.]
Consider the meaning of the word "obvious." An advance can not be patented if it was obvious. And that is a simple enough word, of transparent (self-referential!) significance, right? Maybe not. The U.S. Supreme Court wrestled with that one two years ago, in the case of KSR v. Teleflex.
This year's struggle was with the word "process." The relevant statutory language says: "Whoever invents or discovers any new or useful process, machine, manufacture, or composition of matter, or any new or useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title." Bilski and an associate have attempted to patent a means of hedging the price of natural gas. This method is obviously not a "machine, manufacture, or composition of matter...." If it is any of the above, it must be a process.
As I noted here back in January, the Court of Appeals upheld the Patent Office. They have both said that the law does not authorize the patenting of an abstract idea, and the "process" Bilski has devised is a dressed-up abstraction. More specifically, the Court of Appeals said that a process becomes patentable only if it is tied to a "particular machine," or if it transforms a particular article into "a different state or thing."
This immediately raised the question: has the Court of Appeals nixed the patenting of software altogether? Any software is designed to run on some hardware, but it is not clear that "any digital computer" would satisfy the Court of Appeals' understanding of the phrase "particular machine." That court punted this question of application in a footnote: "We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine."
I suspect that footnote earned this decision its grant of certiorari to the Supreme Court of the United States.
At arguments yesterday, the Justices seemed unhappy with the idea of granting Bilski his patent, but they also seemed unhappy with the reasoning of the court below. Chief Justice Roberts asked Bilski's attorney, "How is that not an abstract idea? You initiate a series of transactions between commodity providers and commodity consumers. You set a fixed price at the consumer end, you set a fixed price at the other end, and that's it."
My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea. After all, digital computers are a pretty integral part of the US economy these days, and pretending to decide such a question while saying "we'll think about computers later" borders on insincerity.
Monday, November 9, 2009
The chairman of the Securities and Exchange Commission, Mary Schapiro, gave a speech November 4 to the Practicing Law Institute, and addressed the issue of shareholder voting.
First, by way of throat clearing, she said things like this: "I know that we might sit on opposite sides of the table in any given matter, but I believe that all of us — regulators, attorneys, and business people alike — all share the common goal of ensuring that our capital markets work — and work fairly and effectively."
But, hey, why should I offer you a Readers' Digest version of what she said? Here is the link.
Sunday, November 8, 2009
Mr. Tannin, for example, emailed to Cioffi on the basis of a recent market research report, saying that if the report is "ANYWHERE CLOSE to accurate, I think we should close the funds now." But soon thereafter, he told investors he was "comfortable" with the funds' performance. According to the prosecution, this crosses the line between permissible puffing and criminal lying.
In final argument, Tannin's attorney, Susan Brune, said that in the context of the whole email the "anything else" comment ceases to seem incriminating. She asked the jury to "send Matt home to his family."
Was she crying when she said this? I wasn't there, but apparently somebody heard or thought that they heard a quaver in her voice. The rule for a professional advocate is: what works, within the law. And there is no question but that a quavering voice is within the law. we'll see how it works.
Wednesday, November 4, 2009
The plaintiffs in this litigation contend that retail shareholders are paying higher fees that institutional shareholders and that this is unfair. Harris Associates runs the Oakmark Fund, which apparently charges less than one-half of one percent to an unnamed institutional investor for managing assets of $160 million, or $720,000. But individual investors pay 0.88% on the same portfolio. Is that fair? More to the point, is it a violation of fiduciary duties?
The established precedent is the Gartenberg decision of 27 years ago. In that decision, the Second Circuit said that breach of fiduciary duty will be found only if the fee charged by an investment advisor is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Subsequently, the Second Circuit enumerated five factors that may be used to inform this test, and other Circuits have until quite recently followed its lead. Those factors are:
•The nature and quality of services provided to fund shareholders by the adviser;
•The profitability of the fund to the adviser;
•The fall-out benefits enjoyed by the adviser;
•The existence of economies of scale; and
•The independence and conscientiousness of the trustees.
It is this test that the plaintiffs said the Harris Associates' tiered structure of fees, at the expense of the retail investors, violates. And it is the seventh circuit thathas rocked this doctrinal boat, rejecting Gartenberg in the Jones v. Harris Associates matter. The Secenth Circuit Court said that investors do not need judicial protection so long as the advisors make full disclosure concerning their fees. Investors are then free to avoid or sell high-cost funds, in effect voting with their feet.
This was the issue before SCOTUS. For more, go here.
Tuesday, November 3, 2009
An analyst's note from Merrill Lynch says: "The third quarter offers Kraft a chance to demonstrate that 'old Kraft' is continuing to turn the corner before potentially pairing up with Cadbury.
But there is no luxury of time. Under the Takeover Panel's deadline, Kraft must make an offer by the end of the business day on November 9 or walk away for six months.
Kraft will report those third-quarter reports later today. Here is a preview.
Kraft's transaction info is here.
And Cadbury's response? voila!.
Monday, November 2, 2009
At the recent special meeting of Zweig TRF's shareholders, held October 27, the shareholders had the option of converting the fund to an open-ended fund, but only 8% of outstanding shares were voted in favor of such a proposal.
It seems that the conversion proposal was presented to shareholders in accordance with Zweig TRF's Articles of Incorporation because its shares traded on the New York Stock Exchange during the quarter ended June 30, 2009 at an average discount from their net asset value of 10% or more.
The amount of the discount is determined on the basis of the figure at the end of the last trading day in each week during the quarter.
Sunday, November 1, 2009
O'Quinn is perhaps best known to the general public as one of the lawyers involved in successful litigation against tobacco companies. He has also been called the "unchallenged king of breast implant," litigation.
But the reason I knew him, and the reason his death is worth mentioning here, is that in his final years he become involved in the anti-nakedness crusade, i.e. the effort to characterize "naked short selling" as a destroyer of companies and a rampant form of stock market manipulation. I spoke to O'Quinn a handful of times on the subject -- and though I think the cause misguided, O'Quinn himself was always a gentleman and with his passing I will remember him as such.