The legitimate part of the Madoff operation may not have been.
This story has been evolving over roughly five financial quarters now. One constant has been the distinction between the trading (market making) side and the asset management (or investment advisory or just IA) side of Bernie Madoff's operations, a distinction always described as crucial. Madoff's trading operation, which had been quite innovative when launched in 1960, was controversial in some respects (especially among those of us who consider the practice of payment-for-order-flow inherently dubious), but it was legal.
Madoff was often suspected of attaining the unusually consistent results of the account management operation by "front-running," i.e. by making illegal use of information he acquired as a market maker. The SEC would periodically investigate Madoff, only to find that he wasn't front running, so he must be clean! The truth of course is that he wasn't front running because he wasn't really trading through the IA wing of his company at all. It was all a sham, and those surprisingly consistent results were simply invented. So the possibility of front-running was serving perhaps two purposes. First, as noted it was a false scent that kept the regulators harmlessly occupied. But, secondly, it may have helped attract investors. "Pssst, this guy is likely front-running the info from his market maker side. We should get us a piece of that action."
Again, the above two paragraphs state the conventional wisdom. But the new arrest indicates there was still more to the story. Daniel Bonventre, the Madoff associate now under fire, was for thirty years the director of operations of the market-making part of the operation. Here's the criminal complaint against him.
Authorities allege that the income from the ponzi scheme was used to support the market-making operation at least from 1997 onward, and that the necessary transfers were accounted for on the books in such a way as to conceal their true source. Most reports indicate that they caught on to Bonventre because Frank DiPascali has been squealing like a stuck pig of late.
I hereby point out, as is only right, that Bonventre through his attorney has denied doing anything wrong and that he is innocent until proven guilty.
Still, if the investigators are on to something, this changes a good deal. Other potential defendants arise once the supposed wall between the legitimate and illegitimate sides of the supposedly bifurcated operations turns out to have been porous.
Sunday, February 28, 2010
Wednesday, February 24, 2010
Gasparino Goes to Fox
Charles Gasparino, until recently an on-air editor at the buisness-oriented cable-TV operation CNBC, has announced a move to Fox Business.
This prompts a retrospective. Charlie gave us all a memorable zone-out in late October 2008. Of course, that was a busy time for reporters with the Wall Street beat, but this was simply strange. "Closing Bell," anchor Dylan Ratigan introduced CG, obviously under the impression that CG was in possession of some new important information about Merrill Lynch.
The camera then framed Charles with the words "Management turmoil continues at Merrill Lynch" bannered beneath his face.
But whatever news or rumor Charles had been ready to convey on that subject never got out to us. Apparently, he took offense at the way he was introduced, the open-ended phrase "what do ya got?" -- what followed was an extremely odd colloquy over the Zen-like nature of that expression. This produced the expression, "shoot to the capitalist system." I wonder if he'll ever use that line on Fox?
In July 2009, Charles was one of the three "drama pundits" who received some attention from Janet Tavakoli in her column, under the heading, "Where Were the Drama Pundits [Whitney, Taleb and Gasparino] When it Mattered?"
Janet's point was that
Gasparino (like the others named there) boxes with shadows, and can not be taken seriously as a market analyst. ACtually, she was more kind to CG than she was to the other two named.
Late last year, HarperCollins brought out CG's book, The Sellout, on the crisis of 2008. I discussed that book and its portrayal of Dick Fuld, in this blog on November 15. He is a favorite target of amused scorn at Dealbreaker. But then, so is Fox Business News. So from the Dealbreaker POV, this is a perfect match. Here's a link for them in gratitude
So ... best of luck to the lovebirds.
EDIT: Here's another link that may be of interest.
This prompts a retrospective. Charlie gave us all a memorable zone-out in late October 2008. Of course, that was a busy time for reporters with the Wall Street beat, but this was simply strange. "Closing Bell," anchor Dylan Ratigan introduced CG, obviously under the impression that CG was in possession of some new important information about Merrill Lynch.
The camera then framed Charles with the words "Management turmoil continues at Merrill Lynch" bannered beneath his face.
But whatever news or rumor Charles had been ready to convey on that subject never got out to us. Apparently, he took offense at the way he was introduced, the open-ended phrase "what do ya got?" -- what followed was an extremely odd colloquy over the Zen-like nature of that expression. This produced the expression, "shoot to the capitalist system." I wonder if he'll ever use that line on Fox?
In July 2009, Charles was one of the three "drama pundits" who received some attention from Janet Tavakoli in her column, under the heading, "Where Were the Drama Pundits [Whitney, Taleb and Gasparino] When it Mattered?"
Janet's point was that
Gasparino (like the others named there) boxes with shadows, and can not be taken seriously as a market analyst. ACtually, she was more kind to CG than she was to the other two named.
Late last year, HarperCollins brought out CG's book, The Sellout, on the crisis of 2008. I discussed that book and its portrayal of Dick Fuld, in this blog on November 15. He is a favorite target of amused scorn at Dealbreaker. But then, so is Fox Business News. So from the Dealbreaker POV, this is a perfect match. Here's a link for them in gratitude
So ... best of luck to the lovebirds.
EDIT: Here's another link that may be of interest.
Tuesday, February 23, 2010
Dubai World
It is an ill wind that blows no good. I see in a story in the FT yesterday that Aidan Birkett, of Deloitte, has been chosen as the chief restructuring officer at Dubai World.
Dubai World (DW) is an investment company that is essentialy a private contractor for the government of that Emirate, handling a portfolio of businesses for it. DW could cause quite a splash by defaulting on its debts, something that the relevant chunks of the world have worried about since November. Indeed, you might think that no good could come out of the failure of Dubai World with all it would imply.
But, then, Accountancy Age says this is a great opportunity for Birkett and Deloitte. Indeed, it "should provide Deloitte and Birkett with the kind of boost that Lehmans has given PwC – the latest count shows the administration has wracked up £150m in fees." For my fellow Americans, GBP£150m is about USD$232 million. That's how much PricewaterhouseCoopers has gotten on the Lehman deal?
It beats keeping the votes on Oscar nominees safe until some celebrity can get on stage to tear open the envelope.
As for the blow-by-blow on the restructuring, there is this.
Dubai World (DW) is an investment company that is essentialy a private contractor for the government of that Emirate, handling a portfolio of businesses for it. DW could cause quite a splash by defaulting on its debts, something that the relevant chunks of the world have worried about since November. Indeed, you might think that no good could come out of the failure of Dubai World with all it would imply.
But, then, Accountancy Age says this is a great opportunity for Birkett and Deloitte. Indeed, it "should provide Deloitte and Birkett with the kind of boost that Lehmans has given PwC – the latest count shows the administration has wracked up £150m in fees." For my fellow Americans, GBP£150m is about USD$232 million. That's how much PricewaterhouseCoopers has gotten on the Lehman deal?
It beats keeping the votes on Oscar nominees safe until some celebrity can get on stage to tear open the envelope.
As for the blow-by-blow on the restructuring, there is this.
Monday, February 22, 2010
Medafor ISO Biotech Partner
Another story line to watch. Steven Anderson, the president and chief executive of CryoLife Inc. has written a letter to the board of directors of Medafor, a Minnesota based medical-technology company, suggesting a proxy fight is in the works.
The fate of the two companies is intertwined anyway. Cryolife (which is Georgia based) is the distributor of Medafor's product, HemoStase, a powder used to stop bleeding. In January, Cryolife bought 1.6 million shares of Medafor, and more recently indicated that it would like to buy the company outright, for $2 a share. Medafor rejected that offer, and Anderson's letter came in response to that rejection.
Then, in a conference call on Thursday, Anderson made the following pitch to Medafor shareholders: "Medafor's difficulty in securing working capital is a good illustration of a weakness we can help the company to overcome. Over the last two years, Medafor's management has attempted to secure more working capital in order to access better cash flow. This has been very difficult for management to accomplish because of the financial environment in the U.S. and the illiquidity issues facing the company. Medafor has been further hindered by a 'going concern' letter issued to the company in September 2009 by KPMG, Medafor's auditor, in connection with their 2008 audit of Medafor. A letter like this is issued by an auditing firm when they feel that the company may not have the capital resources to survive for the next twelve months. Both of these situations have negatively affected management's ability to adequately fund the company."
The fate of the two companies is intertwined anyway. Cryolife (which is Georgia based) is the distributor of Medafor's product, HemoStase, a powder used to stop bleeding. In January, Cryolife bought 1.6 million shares of Medafor, and more recently indicated that it would like to buy the company outright, for $2 a share. Medafor rejected that offer, and Anderson's letter came in response to that rejection.
Then, in a conference call on Thursday, Anderson made the following pitch to Medafor shareholders: "Medafor's difficulty in securing working capital is a good illustration of a weakness we can help the company to overcome. Over the last two years, Medafor's management has attempted to secure more working capital in order to access better cash flow. This has been very difficult for management to accomplish because of the financial environment in the U.S. and the illiquidity issues facing the company. Medafor has been further hindered by a 'going concern' letter issued to the company in September 2009 by KPMG, Medafor's auditor, in connection with their 2008 audit of Medafor. A letter like this is issued by an auditing firm when they feel that the company may not have the capital resources to survive for the next twelve months. Both of these situations have negatively affected management's ability to adequately fund the company."
Sunday, February 21, 2010
Carl Icahn
Carl Icahn said this week that he is not seeking control of Lions Gate Enetrtainment, but he is looking to increase his stake therein because he remains skeptical of the management's buying-binge tendencies.
In the past, Icahn has criticized Lions Gate for paying $255 million to buy TV Guide. As you may recall, I've had my eye on the Icahn-Lion relationship for some time, hoping that some fireworks may result.
You'll see a stock chart above. It shows the price rise when Icahn was increasing his share of the company Tuesday, then the decline on Thursday when he announced he doesn't want to buy it. He evidently broke some hearts there.
It isn't Icahn's favored M.O. to acquire a company outright. At one time he was known as a "greenmailer," i.e. he would threaten to cause trouble in the boardroom unless he received a chunk of money. Receiving same, he would sell his share silently and go away happy.
Would he quarrel with that description of his own old (1980s) methods? I doubt it. In the article to which I just linked you, a Forbes magazine piece from four years ago, Icahn is quoted as saying, "Now there is no greenmail." So formerly there was ... right?
Anyway, activist investors nowadays like to remain minority investors, with a large enough stake to allow them to press for specific measures that will increase the value of that stake. I'm sure Icahn would rather Lions Gate be taken over rather than that it do the taking.
Wednesday, February 17, 2010
Three brief items
1. APD's Bid for ARG
In my entry on Tuesday, February 9, I wrote that Air Products & Chemicals (APD) had an unsolicited bid outstanding to buy a rival, Airgas Inc (ARG) and was ready to launch a proxy fight in support thereof. There have been further developments.
Airgas, which is based in Radnor, PA, is resisting its suitor, and has sued Cravath, Swaine & Moore, a venerable law firm assisting APD in this matter. If I understand the story correctly, (and that is not a sure thing), Cravath has in the recent past represented Airgas. It is now working with APD. Airgas contends that given that law firm's knowledge of their own operations, Cravath should be disqualified from this matter.
To this underlying dispute is added a jurisdictional tangle, because ARG brought its lawsuit against Cravath in a Pennsylvania state court. Meanwhile, other matters related to this unsolicited bid are before the Chancery Court in Delaware. APD sees the choice of forum as a dirty trick: “Having long known of Cravath’s work for Air Products on this matter, Airgas could have opposed Cravath’s representation of Air Products in this case by filing a motion for disqualification,” Air Products attorney Kenneth Nachbar wrote in a letter to the Delaware judge involved, "Airgas chose instead to circumvent this court’s authority and sued Air Products’ counsel, Cravath, in Pennsylvania.”
2. New book about Bill Lerach.
Readers of this blog will know the name Bill Lerach. And some may be interested in the arrival of a new book from Random House, Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees, by Patrick Dillon and Carl Cannon.
I remember the key episode in this downfall quite well. On May 18, 2006, the US grand jury in Los Angeles indicted five named individuals (Lerach was not one of them) in a case that involved the law fim that had grown to fame as Lerach's alter ego, Milberg Weiss. The indictment had twenty counts, more than 100 pages, and a memorable detail about a piece of furniture. Apparently, partner David Bershad kept a stash of money in a safe in his office, and kept the safe inside a credenza. From here he would make the illegal payouts that were the center of the scandal.
Bershad pleaded guilty, and it appears to have been Bershad's cooperation that helped authorities zero in on what they regarded as a bigger fish, Lerach.
3. Apollo is buying Cedar Fair.
Cedar Fair is a publicly traded company, headquartered in Sandusky, Ohio, that by some measures ins the second most successful theme park operator in the world -- second, of course, to the Mouse. Cedar Fair will be acquired by Apollo Management, and taken private.
This is assuming, as everybody does, that the deal will be approved at the March 16Cedar Fair shareholders meeting.
In my entry on Tuesday, February 9, I wrote that Air Products & Chemicals (APD) had an unsolicited bid outstanding to buy a rival, Airgas Inc (ARG) and was ready to launch a proxy fight in support thereof. There have been further developments.
Airgas, which is based in Radnor, PA, is resisting its suitor, and has sued Cravath, Swaine & Moore, a venerable law firm assisting APD in this matter. If I understand the story correctly, (and that is not a sure thing), Cravath has in the recent past represented Airgas. It is now working with APD. Airgas contends that given that law firm's knowledge of their own operations, Cravath should be disqualified from this matter.
To this underlying dispute is added a jurisdictional tangle, because ARG brought its lawsuit against Cravath in a Pennsylvania state court. Meanwhile, other matters related to this unsolicited bid are before the Chancery Court in Delaware. APD sees the choice of forum as a dirty trick: “Having long known of Cravath’s work for Air Products on this matter, Airgas could have opposed Cravath’s representation of Air Products in this case by filing a motion for disqualification,” Air Products attorney Kenneth Nachbar wrote in a letter to the Delaware judge involved, "Airgas chose instead to circumvent this court’s authority and sued Air Products’ counsel, Cravath, in Pennsylvania.”
2. New book about Bill Lerach.
Readers of this blog will know the name Bill Lerach. And some may be interested in the arrival of a new book from Random House, Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees, by Patrick Dillon and Carl Cannon.
I remember the key episode in this downfall quite well. On May 18, 2006, the US grand jury in Los Angeles indicted five named individuals (Lerach was not one of them) in a case that involved the law fim that had grown to fame as Lerach's alter ego, Milberg Weiss. The indictment had twenty counts, more than 100 pages, and a memorable detail about a piece of furniture. Apparently, partner David Bershad kept a stash of money in a safe in his office, and kept the safe inside a credenza. From here he would make the illegal payouts that were the center of the scandal.
Bershad pleaded guilty, and it appears to have been Bershad's cooperation that helped authorities zero in on what they regarded as a bigger fish, Lerach.
3. Apollo is buying Cedar Fair.
Cedar Fair is a publicly traded company, headquartered in Sandusky, Ohio, that by some measures ins the second most successful theme park operator in the world -- second, of course, to the Mouse. Cedar Fair will be acquired by Apollo Management, and taken private.
This is assuming, as everybody does, that the deal will be approved at the March 16Cedar Fair shareholders meeting.
Tuesday, February 16, 2010
Safety in Numbers
A man who identifies himself as the general counsel for basketball great Shaquille O'Neal has sent a "cease and desist" letter to a fellow resident of this not-really-a-place we call the econoblogosphere.
The lawyer is Dennis A. Roach and the recipient of his nastygram isTim Sykes.
I'm not a big fan of Sykes' blog. He's a self-promoting penny-stocks guru who was featured in a program called Wall Street Warriors back in the day. He came to my attention only because they had some fun with him over at Dealbreaker which, as you known I follow religiously.
Anyway, this isn't about fandom. Its about an effort to censor an internet blowhard. We can't let that happen. So, let me be plain: Sykes has been saying unflattering things about a stock called NXT Nutritionals Holdings Inc., with stock symbol NXTH. Shaq has become a spokesman for NXTH, and thus has put himself in the line of fire.
Sykes has said things like this:
By the end of 2012, regulatory filings show, NXTH must give O’Neal 3 million shares of company stock in exchange for his publicity services. He was scheduled to receive the first 1 million shares back in November, filings show, and can start selling them at the beginning of February. At that point, he will be free to sell up to 20,000 NXTH shares a day (but no more than 100,000 shares a month) if he chooses to do so.
Clearly, NXTH could face some intense selling pressure – potentially crushing ordinary shareholders – if private investors like O’Neal start dumping their stock next month.
C’mon Shaq, aren’t you rich enough? Don’t you have any better financial advisors than your current ones who got you into bed with such snakes?
That is what has produced the cease-and-desist letter. Well ... now those same words are on this blog too. Let us see if I have the honor of receiving such a letter. There is safety in numbers.
Props to Gary Weiss for his blog entry on point here.
The lawyer is Dennis A. Roach and the recipient of his nastygram isTim Sykes.
I'm not a big fan of Sykes' blog. He's a self-promoting penny-stocks guru who was featured in a program called Wall Street Warriors back in the day. He came to my attention only because they had some fun with him over at Dealbreaker which, as you known I follow religiously.
Anyway, this isn't about fandom. Its about an effort to censor an internet blowhard. We can't let that happen. So, let me be plain: Sykes has been saying unflattering things about a stock called NXT Nutritionals Holdings Inc., with stock symbol NXTH. Shaq has become a spokesman for NXTH, and thus has put himself in the line of fire.
Sykes has said things like this:
By the end of 2012, regulatory filings show, NXTH must give O’Neal 3 million shares of company stock in exchange for his publicity services. He was scheduled to receive the first 1 million shares back in November, filings show, and can start selling them at the beginning of February. At that point, he will be free to sell up to 20,000 NXTH shares a day (but no more than 100,000 shares a month) if he chooses to do so.
Clearly, NXTH could face some intense selling pressure – potentially crushing ordinary shareholders – if private investors like O’Neal start dumping their stock next month.
C’mon Shaq, aren’t you rich enough? Don’t you have any better financial advisors than your current ones who got you into bed with such snakes?
That is what has produced the cease-and-desist letter. Well ... now those same words are on this blog too. Let us see if I have the honor of receiving such a letter. There is safety in numbers.
Props to Gary Weiss for his blog entry on point here.
Monday, February 15, 2010
Kurtz v. Holbrook
The Delaware Court of Chancery recently issued a decision in the potentially important corporate-governance case of KURTZ v. HOLBROOK, on February 9.
You can read the decision here, or just accept the spoon-feeding below.
The case involved a contest for control of a microcap company named EMAK Worldwide. The Inspector of Elections had disallowed some 1 million voted shares held in their "street name" becaise they had not been accompanied by a DTC "universal proxy." Thus, the incumbents kept their control over EMAK. In the process, the incumbents also secured passage of a bylaw that reduced the size of the board, in effect pulling the chair out from under two of the incumbents who had been insufficiently responsive to the will of the one large preferred stockholder.
The dissidents sued, and the Court ruled in their favor on a range of issues.
1. Street name holders are shareholders of record for purposes of voting rights, even without a DTC "universal proxy"
2. The court invalidated the by-law amendment reducing the size of the board,
3. Any bylaw that sought to achieve the same effect by disqualifying a sitting director and this terminating his services will be invalid under Delaware law;
4. There was also a dispute in this case over the issue of "vote buying," a charge that the incumbents levelled against the dissidents. This is one form of a broader issue I've mentioned here before: how should courts respond as voting interests become severed from economic interests?
See the nice passage on pages 62-63 of the pdf. "'Vote buying' is an incendiary phrase...."
You can read the decision here, or just accept the spoon-feeding below.
The case involved a contest for control of a microcap company named EMAK Worldwide. The Inspector of Elections had disallowed some 1 million voted shares held in their "street name" becaise they had not been accompanied by a DTC "universal proxy." Thus, the incumbents kept their control over EMAK. In the process, the incumbents also secured passage of a bylaw that reduced the size of the board, in effect pulling the chair out from under two of the incumbents who had been insufficiently responsive to the will of the one large preferred stockholder.
The dissidents sued, and the Court ruled in their favor on a range of issues.
1. Street name holders are shareholders of record for purposes of voting rights, even without a DTC "universal proxy"
2. The court invalidated the by-law amendment reducing the size of the board,
3. Any bylaw that sought to achieve the same effect by disqualifying a sitting director and this terminating his services will be invalid under Delaware law;
4. There was also a dispute in this case over the issue of "vote buying," a charge that the incumbents levelled against the dissidents. This is one form of a broader issue I've mentioned here before: how should courts respond as voting interests become severed from economic interests?
See the nice passage on pages 62-63 of the pdf. "'Vote buying' is an incendiary phrase...."
Sunday, February 14, 2010
Infineon Meeting: Incumbent victory
Infineon held its shareholders meeting on Thursday, and the incumbents won.
Infineon Technologies AG, a Germany-based chipmaker, has approximately 25,650 employees worldwide, with major operations in the US, Japan, and Singapore. It is listed on the Frankfurt stock exchange with the sumbol IFX, and in the US over-the-counter market as IFNNY.
As noted in this space on February 1, dissidents led by Hermes had nominated Willi Berchtold, the chief financial officer of ZF Friedrichshafen AG, as the next chairman of the board in place of the incumbent director who hads been set to take the chair, Klaus Wucherer. Wucherer won, with 72.5% of the vote.
There are efforts underway to read broad significance into this. A rejection of the free-wheeling "Anglo-American" style of capitalism of which proxy contests are supposedly a part. Here's what Laura Stevens of the Wall Street Journal said on the subject.
Personally, I don't see huge significance. Shareholders will continue to rebel from time to time in contexts in which there are overly cozy interlocking directorships. Some of those rebellions will fall short. It is ever thus. In general, the direction of progress is toward greater and more immediate control on the part of the shgareholders, toward the reconstruction of corporate boards as intermediaries rather than as "the decider." That general direction of progress remains.
Infineon Technologies AG, a Germany-based chipmaker, has approximately 25,650 employees worldwide, with major operations in the US, Japan, and Singapore. It is listed on the Frankfurt stock exchange with the sumbol IFX, and in the US over-the-counter market as IFNNY.
As noted in this space on February 1, dissidents led by Hermes had nominated Willi Berchtold, the chief financial officer of ZF Friedrichshafen AG, as the next chairman of the board in place of the incumbent director who hads been set to take the chair, Klaus Wucherer. Wucherer won, with 72.5% of the vote.
There are efforts underway to read broad significance into this. A rejection of the free-wheeling "Anglo-American" style of capitalism of which proxy contests are supposedly a part. Here's what Laura Stevens of the Wall Street Journal said on the subject.
Personally, I don't see huge significance. Shareholders will continue to rebel from time to time in contexts in which there are overly cozy interlocking directorships. Some of those rebellions will fall short. It is ever thus. In general, the direction of progress is toward greater and more immediate control on the part of the shgareholders, toward the reconstruction of corporate boards as intermediaries rather than as "the decider." That general direction of progress remains.
Wednesday, February 10, 2010
Last Friday morning
Last Friday I attended a hearing, in Manhattan, and listened to witnesses testify before the Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, on a proposed re-write of Rule 2019.
As is my usual practice in these matters, I drove down to Stamford the previous evening, stayed at a hotel (by preference La Quinta, which is convenient to both the highway and the train station), then took MetroNorth into Grand Central early Friday morning. When I arrived at the hotel, around 9 PM Thursday, there were three police cars in front of the main entrance. Two more were to come by a couple of minutes later. Bravely pushing on despite my own desperado past, I went to the front desk to check in anyway.
Curiousity in its cat-killing way got the better of me, and I made discrete inquiries. It appears that a homeless man had been camping out in of the the supposedly unocuupied rooms of the hotel. I'm unsure how he had originally gotten there, but apparently housekeepiung discovered him. All the police were doing was trying to find out who he was -- deliver him to some relation if they could find one -- deliver him to one of the city's shelters otherwise. For this they needed five squad cars? I'm guessing conversational lulls were ruling the day at the coffee shops on Stamford where that city's Finest hang out, and they relished the diversion.
Anyway, my train ride went smoothly the next morning and I was soon in Grand Central. I elected to take a cab from there to the federal courthouse near Foley Square where the hearing was to be, and the cabbie elected the FDR.
There are no trash bins within about two blocks of that courthouse. I know this because a woman in line with me at the security checkpoint was complaining about this as she held an empty styrofoam cofee cup in her hand. She had purchased the coffee who-knows-where and had found no place wherein the discard the cup.
My hearing took place on the 23d floor. The room's window faced north, and there was an impressive view of the towers of midtown.
The hearing was actually of interest as these things go, though its unlikely any of the fifty or so non-testifying observers was there for fun. I suppose you know a good deal more about that evening and morning in my life now than you ever thought you would. The point? -- well, how about this: this is my blog, and I can be self-indulgent if I want to.
As is my usual practice in these matters, I drove down to Stamford the previous evening, stayed at a hotel (by preference La Quinta, which is convenient to both the highway and the train station), then took MetroNorth into Grand Central early Friday morning. When I arrived at the hotel, around 9 PM Thursday, there were three police cars in front of the main entrance. Two more were to come by a couple of minutes later. Bravely pushing on despite my own desperado past, I went to the front desk to check in anyway.
Curiousity in its cat-killing way got the better of me, and I made discrete inquiries. It appears that a homeless man had been camping out in of the the supposedly unocuupied rooms of the hotel. I'm unsure how he had originally gotten there, but apparently housekeepiung discovered him. All the police were doing was trying to find out who he was -- deliver him to some relation if they could find one -- deliver him to one of the city's shelters otherwise. For this they needed five squad cars? I'm guessing conversational lulls were ruling the day at the coffee shops on Stamford where that city's Finest hang out, and they relished the diversion.
Anyway, my train ride went smoothly the next morning and I was soon in Grand Central. I elected to take a cab from there to the federal courthouse near Foley Square where the hearing was to be, and the cabbie elected the FDR.
There are no trash bins within about two blocks of that courthouse. I know this because a woman in line with me at the security checkpoint was complaining about this as she held an empty styrofoam cofee cup in her hand. She had purchased the coffee who-knows-where and had found no place wherein the discard the cup.
My hearing took place on the 23d floor. The room's window faced north, and there was an impressive view of the towers of midtown.
The hearing was actually of interest as these things go, though its unlikely any of the fifty or so non-testifying observers was there for fun. I suppose you know a good deal more about that evening and morning in my life now than you ever thought you would. The point? -- well, how about this: this is my blog, and I can be self-indulgent if I want to.
Tuesday, February 9, 2010
Three brief items
1. Santander Considers Floats
Yesterday's Financial Times, on p. 16, reports that the big Spain-headquartered bank Santander, which owns Sovereign Bancorp in the US, is considering IPOs in both the US and the UK for its operations in those two countries.
The bank was happy with the results of its IPO of its Brazilian subsidiary in October 2009. In general, Santander's subsidiaries are separately capitalized, and the bank has said that as a management philosophy it welcomes the extra scrutiny created by the minority stockholders who buy in through such an IPO.
2. IRS Mulling over Equity Swaps
In the US, the Internal Revenue Service has apparently become interested in the dispute over equity swaps, and their relation to disclosure thresholds. I've discussed this before in connection especially with the CSX case.
Here is Reuters on the tax implications and IRS deliberations.
3. Air Products & Chemicals
What is an "industrial gas" concern? I've been reading that an industrial gas company, Air Products & Chemicals (APD) has an unsolicited bid outstanding to buy a rival, Airgas Inc (ARG) and is ready to launch a proxy fight in support thereof. But the stories don't leave it clear just what these companies do.
Apparently, although APD in particular has a lot of lines of business, the name of the company refers to refinery hydrogen. Near as I understand it, refineries remove sulfur from crude oil, by saturating the fuel with hydrogen first, producing hydrogen sulfide, which can then be removed from the mix. ARG is also apparently involved in the liquefaction of natural gas.
The company, headquartered in Lehigh Valley, Pa., said that it is prepared to make "the appropriate divestitures to gain regulatory approval," of the merger with ARG.
Yesterday's Financial Times, on p. 16, reports that the big Spain-headquartered bank Santander, which owns Sovereign Bancorp in the US, is considering IPOs in both the US and the UK for its operations in those two countries.
The bank was happy with the results of its IPO of its Brazilian subsidiary in October 2009. In general, Santander's subsidiaries are separately capitalized, and the bank has said that as a management philosophy it welcomes the extra scrutiny created by the minority stockholders who buy in through such an IPO.
2. IRS Mulling over Equity Swaps
In the US, the Internal Revenue Service has apparently become interested in the dispute over equity swaps, and their relation to disclosure thresholds. I've discussed this before in connection especially with the CSX case.
Here is Reuters on the tax implications and IRS deliberations.
3. Air Products & Chemicals
What is an "industrial gas" concern? I've been reading that an industrial gas company, Air Products & Chemicals (APD) has an unsolicited bid outstanding to buy a rival, Airgas Inc (ARG) and is ready to launch a proxy fight in support thereof. But the stories don't leave it clear just what these companies do.
Apparently, although APD in particular has a lot of lines of business, the name of the company refers to refinery hydrogen. Near as I understand it, refineries remove sulfur from crude oil, by saturating the fuel with hydrogen first, producing hydrogen sulfide, which can then be removed from the mix. ARG is also apparently involved in the liquefaction of natural gas.
The company, headquartered in Lehigh Valley, Pa., said that it is prepared to make "the appropriate divestitures to gain regulatory approval," of the merger with ARG.
Monday, February 8, 2010
An Overstocked cookie jar
There seems to be a trend developing here. Three months ago, Overstock's stock price was still close to $16. By early December it was at $15. By early January, about $13.50. Now, though, it has fallen below $11.50.
There is a lot of news behind that fall, and I've discussed some of it in this blog, as when the company filed an unreviewed 10Q in November entering into a public debate with Grant Thornton about its books in the process.
Things have gotten worse over the winter. Roddy Boyd wrote a fine article for the online magazine SLATE that proved that diamonds aren't necessarily every girl's best friend.
And this past week? Overstock has acknowledged that its accounting can not be relied upon. Part of the mis-counting to which they've admitted involves those "fulfillment partners" we've discussed here before. I'll quote their dry language verbatim: "Operational errors in the amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related to return processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, the Company applied “gain contingency” accounting for the recovery of such amounts, which it has now determined was an inappropriate accounting treatment. Correction of these errors is expected to shift approximately $1.7 million of income recognized in fiscal year 2009 back to fiscal year 2008."
Which means ... what? It means that the company inappropriately shifted to 2009 income they should have attributed to 2008, and now has been gently persuaded to shift it back. This admission is intended to "address all outstanding issues raised in the comment letter dated November 3, 2009 that the Company received from the Division of Corporation Finance of the Securities and Exchange Commission." It also confirms the long-standing charge by Sam Antar and others that Overstock set up a cookie jar reserve to inflate future profits (or, more strictly, to minimize future losses and make it appear that the company is on a path-to-profit eventually).
Antar (who would want me to remind you at this time that he is a convicted felon himself in connection with the old "Crazy Eddie" scam) explained what was wrong with Overstock's booking many times, such as here, and has now done a warranted victory lap here.
There is a lot of news behind that fall, and I've discussed some of it in this blog, as when the company filed an unreviewed 10Q in November entering into a public debate with Grant Thornton about its books in the process.
Things have gotten worse over the winter. Roddy Boyd wrote a fine article for the online magazine SLATE that proved that diamonds aren't necessarily every girl's best friend.
And this past week? Overstock has acknowledged that its accounting can not be relied upon. Part of the mis-counting to which they've admitted involves those "fulfillment partners" we've discussed here before. I'll quote their dry language verbatim: "Operational errors in the amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related to return processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, the Company applied “gain contingency” accounting for the recovery of such amounts, which it has now determined was an inappropriate accounting treatment. Correction of these errors is expected to shift approximately $1.7 million of income recognized in fiscal year 2009 back to fiscal year 2008."
Which means ... what? It means that the company inappropriately shifted to 2009 income they should have attributed to 2008, and now has been gently persuaded to shift it back. This admission is intended to "address all outstanding issues raised in the comment letter dated November 3, 2009 that the Company received from the Division of Corporation Finance of the Securities and Exchange Commission." It also confirms the long-standing charge by Sam Antar and others that Overstock set up a cookie jar reserve to inflate future profits (or, more strictly, to minimize future losses and make it appear that the company is on a path-to-profit eventually).
Antar (who would want me to remind you at this time that he is a convicted felon himself in connection with the old "Crazy Eddie" scam) explained what was wrong with Overstock's booking many times, such as here, and has now done a warranted victory lap here.
Sunday, February 7, 2010
Prospect Capital, Part Two
On February 1, Prospect (Nasdaq: PSEC) filed with the SEC a preliminary proxy statement in opposition to the proposed merger between Allied and Ares. (For who these entities are, see my Wednesday entry).
They note on the basis of Allied's own filings that as of January 15, 2010, Allied had on hand approximately $185 million of cash, money market and similar securities. This represents the result of significant debt paydowns, and cash and equivalents on hand, and reduces the degree to whicht he entity that would result from a Prospect-Allied tramsaction would start its life in debt. It reduced, in more SEC-atuned terms, "the pro forma leverage of a Prospect-Allied combination."
Also, Allied is associated with a portfolio company, Callidus, and Prospect anticipates that it could further improve its post-merger cash situation by selling Callidus' assets.
Your conclusion then, John Barry? "We believe our pending increased merger proposal, if consummated, will deliver significant benefits to both Prospect and Allied shareholders, including potential upside through Allied’s equity positions in a strengthening economy, increased diversification across more than 130 portfolio companies, and amortization of certain fixed costs across a greater asset base.”
They note on the basis of Allied's own filings that as of January 15, 2010, Allied had on hand approximately $185 million of cash, money market and similar securities. This represents the result of significant debt paydowns, and cash and equivalents on hand, and reduces the degree to whicht he entity that would result from a Prospect-Allied tramsaction would start its life in debt. It reduced, in more SEC-atuned terms, "the pro forma leverage of a Prospect-Allied combination."
Also, Allied is associated with a portfolio company, Callidus, and Prospect anticipates that it could further improve its post-merger cash situation by selling Callidus' assets.
Your conclusion then, John Barry? "We believe our pending increased merger proposal, if consummated, will deliver significant benefits to both Prospect and Allied shareholders, including potential upside through Allied’s equity positions in a strengthening economy, increased diversification across more than 130 portfolio companies, and amortization of certain fixed costs across a greater asset base.”
Wednesday, February 3, 2010
Prospect Capital, Part One
Allied Capital Corp. plans to merge with Ares Capital Corp., and an interloper, Prospect Capital, has shown up at the wedding trying to disrupt the proceedings, like Benjamin at the end of The Graduate.
Said Prospect in a preliminary proxy statement filed January 26, 2010: "We believe that our increased merger proposal should not only provide superior value to Allied shareholders, when compared to the Ares proposal, but also should provide significant value to Prospect shareholders. In our view, the credit markets have improved significantly since October when Allied agreed to merge with Ares. We believe the significant improvement in the credit markets likely increases the value of the Allied portfolio since October and makes Allied asset sales and debt repayments more feasible. The strong GDP numbers released on January 29 further support our belief that there may be smoother sailing ahead for Allied's portfolio companies."
So what's this all about? Ares is a closed-end, non-diversified specialty finance company that is regulated as a Business Development Company, or a BDC, under the Investment Company Act of 1940. The company is publicly traded on the NASDAQ Global Select Market under ticker symbol “ARCC.” Ares Capital became a public company in October 2004 through an initial public offering, which raised approximately $160 million in net proceeds.
Allied Capital (Elaine, in my movie-driven analogy) is also a BDC -- one that manages private funds with total assets under management of $3.3 billion.
Allied had had a special meeting of stockholders scheduled for November 18, 2009, but it was cancelled in light of their deal with Ares. Allied will scheduled a new meeting "in connection with the proposed business combination" sometime within the first quarter of this year, we're told.
Prospect Capital, our Benjamin, is yet another BDC. It says that its "investment objective is to generate both current income and long-term capital appreciation through debt and equity investments." So it obviously distinguishes itself from all those companies with a business objective of losing money.
Now that I've gotten the participants straight, let me see if I can figure out for the next entry, on Sunday, what the dispute is.
Said Prospect in a preliminary proxy statement filed January 26, 2010: "We believe that our increased merger proposal should not only provide superior value to Allied shareholders, when compared to the Ares proposal, but also should provide significant value to Prospect shareholders. In our view, the credit markets have improved significantly since October when Allied agreed to merge with Ares. We believe the significant improvement in the credit markets likely increases the value of the Allied portfolio since October and makes Allied asset sales and debt repayments more feasible. The strong GDP numbers released on January 29 further support our belief that there may be smoother sailing ahead for Allied's portfolio companies."
So what's this all about? Ares is a closed-end, non-diversified specialty finance company that is regulated as a Business Development Company, or a BDC, under the Investment Company Act of 1940. The company is publicly traded on the NASDAQ Global Select Market under ticker symbol “ARCC.” Ares Capital became a public company in October 2004 through an initial public offering, which raised approximately $160 million in net proceeds.
Allied Capital (Elaine, in my movie-driven analogy) is also a BDC -- one that manages private funds with total assets under management of $3.3 billion.
Allied had had a special meeting of stockholders scheduled for November 18, 2009, but it was cancelled in light of their deal with Ares. Allied will scheduled a new meeting "in connection with the proposed business combination" sometime within the first quarter of this year, we're told.
Prospect Capital, our Benjamin, is yet another BDC. It says that its "investment objective is to generate both current income and long-term capital appreciation through debt and equity investments." So it obviously distinguishes itself from all those companies with a business objective of losing money.
Now that I've gotten the participants straight, let me see if I can figure out for the next entry, on Sunday, what the dispute is.
Tuesday, February 2, 2010
Bibliographic Note
I've recently received via snail mail a catalog from Edward Elgar Publishing, giving titles that deal with a wide variety of legal/regulatory matters. One of their recent publications that might be of special interest to readers of this blog is: CORPORATE GOVERNANCE AND DEVELOPMENT, an anthology edited by Thankom Gopinath Arun, of the University of Central Lancashire and the University of Manchester, and John Turner, Queen's University Management School, Belfast.
The catalog descriubes the book as analyzing "the complex relationship between corporate governance and economic develpment by focusing on the reform of corporate governance, the role of the lagl system, and the interconnections with the financial system."
I'd also like to give a shout-out to two forthcoming books from EE.
CORPORATE GOVERNANCE IN MODERN FINANCIAL CAPITALISM, by three authors affiliated with the Stockholm School of Economics, Sweden: Markus Kallifatides, Sophie Nachemsson-Ewall, and Sven-Erik Sjostrand. Available in June 2010.
The authors focus on Old Mutual's takeover of Skandia as a test case of corporate governance.
CONTRACTUAL NETWORKS, INTER-FIRM COOPERATION AND ECONOMIC GROWTH, anothger anthology, edited by Fabrizio Cafaggi, of European University Institute, Italy. Available in September 2010.
Its authors postulate that "collaboration among firms of different sizes constitutes a potential response to numerous weaknesses of modern western industrial systems."
The catalog descriubes the book as analyzing "the complex relationship between corporate governance and economic develpment by focusing on the reform of corporate governance, the role of the lagl system, and the interconnections with the financial system."
I'd also like to give a shout-out to two forthcoming books from EE.
CORPORATE GOVERNANCE IN MODERN FINANCIAL CAPITALISM, by three authors affiliated with the Stockholm School of Economics, Sweden: Markus Kallifatides, Sophie Nachemsson-Ewall, and Sven-Erik Sjostrand. Available in June 2010.
The authors focus on Old Mutual's takeover of Skandia as a test case of corporate governance.
CONTRACTUAL NETWORKS, INTER-FIRM COOPERATION AND ECONOMIC GROWTH, anothger anthology, edited by Fabrizio Cafaggi, of European University Institute, Italy. Available in September 2010.
Its authors postulate that "collaboration among firms of different sizes constitutes a potential response to numerous weaknesses of modern western industrial systems."
Monday, February 1, 2010
Infineon and the Wild West
Klaus Wucherer has been on the board of Infineon, a German based chip maker, for ten years, and he has been designated to step into the chairman's office upon the retirement of the current chairman, Max Dietrich Kley, at an upcoming shareholders' meeting.
But Wucherer has run into some trouble. Several foreign shareholders, led by the UK based investment company Hermes, have complained that replacing Kley with Wucherer is simply a matter of keeping the old guard in place, where what is needed at Infineon is a more sweeping change.
Willi Berchtold, the chief financial officer of ZF Friedrichshafen AG, is the favored next chairman among those who want such change.
The weekend edition of the Financial Times reports (p. 9) that Wucherer has been travelling around the US, where a lot of Infineon's largest shareholders are to be found, seeking support. He has also sought to shore up support for himself by agreeing that he will only serve a single year as chairman -- the dissidents are presumably going to be bought off with the promise that they'll get their desired root-and-branch change soon enough.
This attracts my attention in part because Infineon has played a colorful part in the sparring in recent years over intellectual property in the semiconductor marketplace. In 2000, Rambus Inc. filed a lawsuit against it on the grounds of patent infringement, this was only shortly after Infineon's (1999) split-off from Siemens. The Rambus claim was kicked about through the trial and appellate courts for awhile, but then the claim was dismissed in March 2005, in part because the trial judge decided that Rambus had shredded key documents prior to court hearings.
Really? They felt their case was so weak they had to resort to the shredder? The whole issue of IP rights in the semiconductor industry has a Wild-West feel to it, with lawyers playing the stand-in role for six shooters and courts playing the OK Corral. I'll come back to this another day, but in the meantime I have to say I feel some sentimental fondness for the the incumbents at Infineon, because they survived that shootout in Tombstone and didn't end up in Boot Hill then.
But Wucherer has run into some trouble. Several foreign shareholders, led by the UK based investment company Hermes, have complained that replacing Kley with Wucherer is simply a matter of keeping the old guard in place, where what is needed at Infineon is a more sweeping change.
Willi Berchtold, the chief financial officer of ZF Friedrichshafen AG, is the favored next chairman among those who want such change.
The weekend edition of the Financial Times reports (p. 9) that Wucherer has been travelling around the US, where a lot of Infineon's largest shareholders are to be found, seeking support. He has also sought to shore up support for himself by agreeing that he will only serve a single year as chairman -- the dissidents are presumably going to be bought off with the promise that they'll get their desired root-and-branch change soon enough.
This attracts my attention in part because Infineon has played a colorful part in the sparring in recent years over intellectual property in the semiconductor marketplace. In 2000, Rambus Inc. filed a lawsuit against it on the grounds of patent infringement, this was only shortly after Infineon's (1999) split-off from Siemens. The Rambus claim was kicked about through the trial and appellate courts for awhile, but then the claim was dismissed in March 2005, in part because the trial judge decided that Rambus had shredded key documents prior to court hearings.
Really? They felt their case was so weak they had to resort to the shredder? The whole issue of IP rights in the semiconductor industry has a Wild-West feel to it, with lawyers playing the stand-in role for six shooters and courts playing the OK Corral. I'll come back to this another day, but in the meantime I have to say I feel some sentimental fondness for the the incumbents at Infineon, because they survived that shootout in Tombstone and didn't end up in Boot Hill then.
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