Proxy Partisans

Just a Data Dump

2011-10-05T15:52:00.000-04:00

Now this graph is illuminating. And a bit scary. It tells us the stages by which the remaining ivestment banks became 2 Big 2 Fail.

Wow

Suspension

2010-10-04T09:10:00.002-04:00

I will not be adding new posts to Proxy Partisans for some time now.

It has been fun and a privilege, and I hope to resume when the time is right.

Thank you to all readers.

Posen's speech

2010-10-03T02:04:00.001-04:00

Adam Posen is a senior fellow at the Peterson Institute for International Economics , and you can click on that link to learn more about him. Heavy-duty important economist with trans-Atlantic influence. Member of the monetary policy committee of the Bank of England, etc.

Posen spoke on September 28 to the Hull and Humber Chamber of Commerce, and laid out "the case for doing more." See the whole speech here.

For more of what? by whom? Central bankers "in the UK and beyond," should be doing more to promote recovery, and should not concern themselves with the risk of inflation that this creates.

"[P]olicymakers should not settle for weak growth out of misplaced fear of inflation. If price stability is at risk over the medium-term, meaning over the two- to three-year time horizon ... it is on the downside."

That just sounds insane to me. It seems that our economics gurus have uterly lost sight of the most basic facts about the business cycle. Maybe this video will help. Surely recent events have vindicated Hayek's concern about the boom and bust cycle? Those responsible for the bust are always those who stoked the preceding boom.

We're suffering from the hangover from the last boom-bust, and we're reaching for a hair of the dog. Breaking the addiction would be a better plan.

Dividend policy

2010-09-29T01:38:00.001-04:00

Let's put some links together on the broad subject -- one of great relevance to all the themes of this blog -- of corporate dividend policy. How do companies decide how much cash their stockholders get on a regular basis?

Here's a pdf from Deutsche Bank on the theory and practice.

And here are a few words from scholars at UPenn.

One piece of the puzzle is the fact that individuals in the US are generally taxed more for dividends than for the capital gain on the sale of stock. The dividends are "ordinary income." So, shouldn't a rational investor want the company to keep reinvesting its cash, building up that strike price, and earning him that capital gain? Why does anyone even want a dividend?

On the other hand, a stock that doesn't pay dividends has a Madoff-like air to it. I'm holding on to it so I can sell it at a higher price to someone else, you say? Well, why would he want it? Because he expects to sell it to a yet greater fool further down the road? Somewhere, somebody has to receive a stream of income/cash in order to anchor those capital gains. That, at any rate is one common sensical take on the issue.

At any rate, once a company has a history, a track record as to the quantity of dividends it pays, there is a good deal of pressure to keep it up. The dividend level is "sticky." Why? Because any departure can be taken as a signal. A cut in dividends can be considered proof the company is in trouble and desperately needs to hold onto its cash. An increase in dividends can also be taken as a signal that the company is in trouble, specifically that it is making a desperate move to perfume that fact!

Consider that Lehman Brothers, the broker-dealer that famously declared bankruptcy in September 2008 and set off that autumnal crisis, had increased its own dividends by 13% earlier in the year. You may as well give that some consideration -- if you are the member of a board of directors that institutes such a cut, signalling theorists will consider it for you!

Finally, if you are an investor, you might want to consider a dividend reinvestment plan. Especially because it goes by such a neat acronym. Such a plan is known as a DRIP.

Europe's Hedge Funds

2010-09-28T05:24:00.001-04:00

Deliberations among the nations of the European Union about a new level of regulations for hedge funds there have reached an impasse.

I wrote here 11 months ago that the draft directive circulating at that time was dead as written. There have been lots of developments since.

The U.K., where most of the Europe-headquartered funds actually are, has been working to water down the more draconian aspects of these proposals from within the EU system, and the U.S. has been exerting some pressure from without.

The Brits are worried that this will hurt London's status as one of the world's great financial hubs, while the U.S., and in particular Treasury Secretary Geithner, worries that the EU is going protectionist -- that it will put barriers in the path of any institutions and high net worth investors there who want to entrust their money to operations in New York.

Meanwhile, the French and the Germans are pulling in the other direction, to make the regulations tougher on the nasty hedge funds, whether of New York or London, than the drafts of the directive would have it.

There is an idea circulating in some quarters that hedge funds were at fault in the 2007-08 credit crunch. That is utter nonsense. Quite old-fashioned, supposedly conservative and stodgy, institutions like banks were the real trouble makers. The hedgers generally did a good job of keeping their head while bankers all around them were losing theirs.

At any rate: the news this week is that EU diplomats tried to push the process forward at a meeting Monday, the 27th, but they failed.

A big possible winner is Switzerland. A map will tell you that the Swiss are in Europe, but they don't act like it. They've stayed away from the EU, and if EU rules do become too onerous for HFs, we might see a lot of them developing a taste for Alpine air.

Buy Some Furniture, Give the Cat A Name

2010-09-27T02:21:00.001-04:00

This is the chart for the performance of Tiffany's common stock over the last six months. As you can see, there was an early peak at $52, then a jagged decline to $36 by early July. It has since risen from that, to the neighborhood of $46, although there was another dramatic-looking dip at the end of August.

That dip may have come about largely because Trian Fund, the investment vehicle of Nelson Peltz, has been selling. Trian still owns a 5.43% stake, whichmakes it Tiffany's biggest stockholder.

Tiffany did better-than-expected in recent quarters. But even that hurts it in Shapira's estimation, because she thinks it did well on the basis of declining commodity prices, and its profit margins are not sustainable.

The relevant Goldman Sachs analyst has downgraded Tiffany from neutral to sell. That analyst is Adrianne Shapira by name. She says, "TIF trades at a 26% premium to an index of department stores, which is approaching one standard deviation above the 3-year average premium of 15%. We believe as [earnings estimate] beats moderate in the near term, peak valuations will be tough to sustain."

There is not especially good reason for me to be discussing Tiffany's right now, but it does give me a chance to quote the famous dialog from a certain classic Audrey Hepburn movie:

Holly: Poor old Cat. Poor slob. Poor slob without a name. The way I look at it, I don’t have the right to give him one. We don’t belong to each other; we just took up by the river one day. I don’t even want to own anything until I can find a place where me and things go together. I’m not sure where that is, but I know what it’s like. It’s like Tiffany’s

Fred: Tiffany’s? You mean the jewelry store?

Holly: That’s right. I’m crazy about Tiffany’s…Calms me down right away. The quietness and the proud look of it. Nothing very bad could ever happen to you at Tiffany’s. If I could find a real-life place that made me feel like Tiffany’s then…then I’d buy some furniture and give the cat a name.

Here's hoping that Tiffany's itself finds that place.

Airgas/Air Products

2010-09-26T01:23:00.000-04:00

As regular readers will recall, this blog has traced the sometimes stormy relationship between two competitors in the market for industrial gas supplies, both headquartered in Pennsylvania: Air Products (APD), of Allentown, [get out of my head, Billy Joel!] and Airgas (ARG), of Radnor.

APD bid for ARG back in February and signalled at that time a readiness to wage a proxy fight for control.

Airgas held its annual meeting recently -- September 15. So ... what happened?

Shareholders elected the three nominees for director promoted by APD. But that doesn't mean an acquisition will go through uncontested. The board is staggered, so APD would have to win another election to gain majority control. Even in announcing their election, Airgas cautioned them against over confidence in this regard.

"Although our new directors were originally nominated to stand for election to our Board by Air Products, like all Board members, they have fiduciary duties to all AIrgas stockholders. These duties do not allow them to act in Air Products' interests, or in affiliation with Air Products."

Meanwhile, shareholders also voted on three proposed bylaw amendments designed for the benefit of the would-be acquirer, and it isn't clear what the result was of these votes.

ISS Sides with Burkle in B&N Matter

2010-09-22T02:53:00.000-04:00

Institutional Shareholder Services (ISS) a major proxy-advisory firm, has recommended that shareholders in Barnes & Noble vote for the dissident slate backed by Yucaipa Cos. in the ongoing proxy fight.

B&N holds its annual meeting a week from today. Each of the other three major proxy-advisory firms, Glass Lewis, PROXY Governance, and Egan-Jones, has come down on the management's side.

This is in accord with the developing pattern. The folks at ISS are more likely to back insurgents than their colleagues.

In this case, ISS says: "Barnes & Noble’s history of poor performance, analysts’ lack of confidence in management’s ability to achieve its targets, corporate governance concerns regarding the company’s employment relationships with Leonard and Stephen Riggio, concerns about the independence of the current board, and questions over the rationale for the 2009 acquisition of Barnes & Noble College Booksellers from Chairman Leonard Riggio."

The book selling business is in the midst of a major transformation, and B&N has tried to keep ahead of the curve, bring out its Nook to compete with Amazon's Kindle and the other eReaders on the market for example. B&N has been increasingly aggressive over the last year in using its bricks-and-mortar stores to push the eReader on shoppers. That sounds a bit odd: "Buy this, and you'll never have to come here again!" -- but such is the transition to a digital age. Or to whatever the heck we are all heading for.

But some are skeptical of whether they really are out in front. Goldman Sachs, in a late-August report, said: "Results fell short of our forecast and, more importantly, reduced visibility on objectives going forward, given two factors: (1) Additional disclosure revealed surprisingly low gross profit margins for the .com business, reflecting both sharp, structural margin cuts in the traditional (physical) .com realm, and poor underlying profitability of the digital business in aggregate (Nook + ebooks). (2) Soft superstore sales, as results missed guidance issued two thirds of the way through the July quarter."

Boyd and Interoil

2010-09-21T04:50:00.001-04:00

Roddy Boyd, in his blog, The Financial Investigator, has a fascinating post on The Interoil Math. Interoil is an oil and gas producer that, Boyd says, "recently raised cash at exorbitant rates and appears to be internally valuing its assets way below what the market appears to think they are worth."

So, on such revelations, its stock price should be tanking, right?

Ummm ... no. The stock price rose sharply in the middle of the day Wednesday, September 15, and held level at close to $64 a share through Thursday and Friday, and resumed moving north on Monday.

"To be sure," Boyd continues, "the bull’s case is both elegant and obvious: If there is oil and natural gas is in Papua New Guinea, and in the volumes suggested on the company’s properties, shareholders are in for an instant windfall to the tune of several dozen points worth of price appreciation."

And if my car had a propeller, it would be The Spirit of St Louis.

Provable reserves as I noted last November are hard to come by.Separately: any company that found them in Papua New Guinea would still have to be willing and able to spend the money to exploit them. Yet Interoil is cash strapped -- sufficiently strapped to need to pay those card-card-like interest rates we mentioned above.

Interoil will naturally tempt short selling. Of course, if you do go down that road, you take enormous chances, even if your underlying case is strong. Such intriguing recent books as CONFIDENCE GAME, whatever else they do, make this clear. I don't recommend shorting -- indeed, I don't recommend anything at all. [Except this: for roughly 99% of investors who have an interest in the equity markets, the best course is a simple passively managed fund, tracking some broad-based index.] Still, Interoil is the sort of spectacle that makes one wish there was more shorting activity in the financial world than there is. The number of nest eggs that have to be sacrificed to prove the prophetic powers of P.T. Barnum is unnecessarily high.

The CFTC on CPOs

2010-09-20T01:31:00.000-04:00

The Commodity Futures Trading Commission (CFTC) has asked for public comment on a rulemaking petition from the National Futures Association (NFA), which would narrow the scope of the regulatory exclusion for registered investment companies from commodity pool operators (CPO) status.

Registered investment companies are at present eligible for a broad exemption from CPO status. 17 C.F.R. 4.5, but the petition would require that RICs seeking such an exemption represent that their funds will use commodity futures and commodity options contracts only for bona fide hedging purposes and that the fund will not be marketed to the public as a commodity pool.

The petition contemplates the application of these limits even retrospectively, to companies that previously had filed notices under the broader exemption, though it recommends that these companies be given time to come into compliance.

October 18 (my 52d birthday) is the deadline for comments.

Inflation and the 1970s

2010-09-19T11:28:00.002-04:00

In a lazy-Sunday mood, my mind is wandering back to the 1970s, assisted in its wandering by a recent book, RIGHT STAR RISING, by Laura Kalman.

Kalman's book covers the period 1974 to 1980, a period that began with the resignation of Richard Nixon and ends with the election of Ronald Reagan. How did we get from one to another? One might reasonably have suspected, a priori, that Nixon's fdall would signal a leftward move in the country's politics. Why did that not happen? That is the question that fascinates Kalman.

What I have read of her book has forcefully reminded me of the centrality of inflation in the politics of that period: inflation at levels we have not known since, and inflation that came to be taken for granted year-to-year. Ford declared that we could stop it, and introduced ridiculous WIN buttons. The inflationary environment stimulated more serious policy disputes, such as that over common situs picketing.

So let's think about inflation today. With all the "quantitative easing" and stimulus packages of the last couple of years, shouldn't we have expected some of late? Why has it remained so tame in 2010? Here's a take from The Motley Fool back in March.

One reason it has remained tame is simply that other currencies have taken harder hits than the dollar, and this has allowed the dollar to retain its significance as a safe haven. Switzerland, and its franc, has long been considered another safe haven, but its status as such took some hits in 2009, because the Swiss economy is so closely tied to world banking, and banking as an industry was so much under siege. For investors even nervous about Switzerland, the US dollar looked even better. (Sort of like the way the girls [boys, if you prefer!] all look cuter at closing time?)

Of course the safe-haven notion increased demand for the dollar, and the increased demand has kept its value up, i.e. has foiled the forces that would otherwise have pressed for inflation/devaluation.

But I think we've gotten as much mileage out of that as we're going to get, and we may be headed back to the '70s sans DeLorean.

Three Brief Items

2010-09-15T08:11:00.000-04:00

1. Genzyme Refocus

The Wall Street Journal yesterday told us that Genzyme is selling one of its non-core units, its genetic-testing business, as part of its effort to "fend off" the takeover efforts of Sanofi-Aventis SA.

Genzyme is apparently trying to rid itself of two other units also, a diagnostics concern (that sells tests and testing supplies) and a pharma intermediaries operation. The proceeds from these sales are supposed to go into a pot whence the company will buy back $2 billion of its stock.

2. Mike Castle

Rep. Mike Castle (R-Del.) lost a hotly contested primary campaign in yesterday's voting in Delaware. The usual characterization of this race has been that Castle represents the Republican "establishment" while Christine O'Donnell is the Palin-endorsed, tea-partying "insurgent." As my use of scare quotes indicates, I take such characterizations with more than a grain of salt -- and I don't take salt in my tea. Here's a story from Monday from the AP, about the home stretch of that campaign.

What I do know about Mike Castle, though, is that he was half of the team of Capuano and Castle. Together, he and Michael Capuano (D-Mass.) introduced the Hedge Fund Adviser Registration Act of 2009. It didn't become law as such, but it was one important step in the long legislative history that led to Dodd-Frank, the bill that did become law (with Castle's support)in July 2010.

3. Casey's General Stores

The logic behind consolidation in the retail "convenience outlets" market remains strong. The situation with regard to Casey's General Stores remains confusing.

As regular readers of Proxy Partisans may remember, Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, bid $36 a share for Casey's in April, and raised that to $36.75 in May. That price valued Casey's at $1.9 million.

Casey's has resisted, and to good effect. On September 1 the bid went up again, to $38.50 per share.

Even since then, there's a new suitor. Casey's has revealed that it is in talks with a white knight, 7-Eleven Inc. They are talking about a $40 a share offer, though so far that is merely vapor.

FASB Roundtables

2010-09-14T08:21:00.000-04:00

The Financial Accounting Standards Board (FASB) says that it wil host two public roundtable meetings to hear what participants have to say about private company accounting and reporting issues.

The board's statement attributes to its assistant director for nonpublic entities, Jeffrey Mechanick, the following: “We want to hear a variety of perspectives on how high-quality financial reporting can be achieved while taking into account the specific needs of the private company sector.”

BTW, how cool a surname is "Mechanick"? It gives you confidence that Jeffrey M. really gets under the hood of accounting issues and isn't reluctant about using some elbow grease.

The first roundtable will take place at home, the second on the road. Here is the schedule:

Tuesday, Oct. 12, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 1:00-4:00 p.m. (Eastern Daylight Time)
Location: FASB offices, 401 Merritt 7, Norwalk, CT 06856

Tuesday, Nov. 2, 2010
FASB Public Roundtable Meeting on Private Company Accounting and Reporting Issues
Time: 9:00 a.m.–12:00 p.m. (Central Time)
Location: Dallas, TX (exact location to be announced later)

New Basel Rules

2010-09-13T06:03:00.000-04:00

True to their self-imposed schedule, the top central bankers and banking regulators have announced a deal on Basel III -- the latest step in the globalization of banking regulation.

Here's the official statement.

The statement attributes to Nout Wellink, president of the Netherlands Bank, the following sentiment: "The combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

The new capital requirements are summarized here.

The most relevant US officials are our Fed chairman, Ben Bernanke; our FDIC head, Sheila Bair; and the acting head of the Office of the Comptroller, John G. Walsh. Their agencies issued a joint statement praising the accord. "The agreement represents a significant step forward in reducing the incidence and severity of future financial crises, providing for a more stable banking system that is less prone to excessive risk-taking, and better able to absorb losses while continuing to perform its essential function of providing credit to creditworthy households and businesses," they said.

Aside from reserve numbers, the new rules have a feature known as the "countercyclical capital buffer." The idea here is that banks should have to have more capital when times are good than would be required of them in bad times. The extra "buffer" requirement is intended to dilute the booze at the party at times when credit is growing more quickly in a nation than is that same nation's underlying economy.

Harrisburg crisis

2010-09-12T02:50:00.001-04:00

So, what's the story with Harrisburg, PA and its bonds?

The WSJ in its weekend edition said: "Officials of Harrisburg ... and the state of Pennsylvania are considering several options, including a short-term bank loan, to help the state's debt-laden capital avoid default on a general-obligation bond payment it is scheduled to make in the coming week...."

As Mr MacKay, of South Park Elementary, would put it: "defaulting is bad, mmm-kay?"

An energy incinerator project seems to be at the heart of the crisis.

The whole thing reminds me of Orange County, Calif., in 1994. Except Harrisburg doesn't have the enviable climate of Orange County.

Fiscal officials in Harrisburg can draw some comfort from this. Their chief OC counterpart, Robert Citron, never actually went to prison. He did 1,000 hours of community service, and five years of supervised probation.

Stupid time.

AuthenTec and UPEK Announce Merger

2010-09-08T09:37:00.000-04:00

On Independence Day this year I said that UPEK "has now given up on" its efforts to merge with Authen Tec.

Authen Tec is Florida based, UPEK is a California company. They are both in the biometric identification market -- fingerprint recognition doodads and stuff.

But the merger will go forward. A friendly deal has been reached. This will be accomplished as an Authen Tec purchase of UPEK rather than, as once expected, the other way around.

The two firms have of late been adversaries in IP litigation. In May of this year, the Northern District for the District Court of California, in San Jose, issued this procedural ruling in that case. I haven't kept up with it since, but imagine that the new combined company won't continue suing itself.

I Love These Google Images

2010-09-07T02:03:00.001-04:00

In the case of each of these many images, somebody somewhere decided that the graphic would serve some purpose in explaining how risk management works. Perhaps some of these were first a powerpoint slide.

You have to appreciate the third one from the left on the top row.

I hope all my readers enjoyed their holiday weekend.

Eli Lilly and a generic

2010-09-06T01:40:00.003-04:00

The U.S. Federal Circuit recently upheld a district court on a patent law matter concerning Eli Lilly's drug, Evista (chemical name, raloxifene).

The district court enjoined any manufacture or distribution of a generic version of raloxifene, which is used in the treatment of osteoporosis in postmenopausal women.

The defendant, Teva Pharmaceuticals, disputed the validity of Eli Lilly's patents on the ground of obviousness. In the words of the court, Teva contended "that the Bone Loss Patents or the Low Does Patent would have been obvious to one of ordinary skill in the art."

In finding nonobviousness, the Federal Circuit discussed an earlier study of te use of raloxifene, the Buzdar study, under the heading of "prior art." The critical fact here is that the Buzdar study failed, and "in light of Dr. Budzar's published report describing that failure, the district court correctly found that a person of ordinary skill would have been discouraged from using raloxifene" in further tests. Thus, the scientists working for Lilly were using something more than ordinary skill, and the patent is upheld.

Aleynikov Wins a Round

2010-09-05T01:51:00.000-04:00

In July 2009, FBI agents arrested Sergey Aleynikov, who had formerly worked in the high-frequency trading business of Goldman Sachs Group Inc.

High-frequency trading has become a good deal more prominet in pubklic/regulatory controversies in the intervening 14 months.

But for what exactly was Aleynikov arrested? The charges were: theft of trade secrets; transportation of stolen property in interstate commerce; and illegal access to a computer without permission. The arrest came soon after Aleynikov had left Goldman, and started work for Teza Technologies. Allegedly, Aleynikov had copied and encryptred files from a Goldman server, uploaded those files to a website, then later to a portable memory device, so he could share it with his new buddies as Teza.

Why bring this all up now? Because I see that a Manhattan district court judge Denise Cote has just dismissed one of the charges, unauthorized access. Aleynikov's alleged actions took place in his final days of employment at Goldman, when he did still have permission to access the firm's computers, and Cote found that he did not exceed the authorization he had been granted.

Prosecution will continue as to the other counts, but this dismissal does show that these sorts of actions are very difficult -- prosecutors have a tough time prevailing.

Which is as it ought to be.

Bankruptcy and Disclosure

2010-09-01T09:15:00.002-04:00

The bankruptcy case concerning WMI, the former holding company of WaMu, continues its slow-paced way through the pertinent court in Delaware, under the guidance of Judge Mary Walrath.

On August 30, the consortium of trust preferred security holders (the TPS consortium) filed a motion that the debtors be deemed to have made certain admissions.

The WMI litigation was at one time chiefly a dispute between the debtor estate itself, on the one hand, and JPMorgan on the other., Back in the chaotic autumn of 2008, the FDIC seized WaMu, ran a quick min-auction, and sold it to JPMorgan. Everything was done so quickly that there was no real sorting out of the assets -- what belonged to the holding company, which thereafter declared bankruptcy, and what belonged to the operating company, which was now part of JPM.

So those two sides fought out the allocation of assets in bankruptcy court. They have more recently kissed and made up. Their making up is known as the "global settlement." But ... not so fast! says the TPS Consortium. "We're not sure we want you guys to make up."

Go here and then go to page 12 of that PDF. That was a letter written July of this year.

In the money quote, TPS says that in the pre-settlement litigation, "Debtors made numerous claims of value purportedly owned by, or owed to, the Debtors, which claims, if successful, could have resulted in significant distribution to creditors in these cases, including members of Class 19. But, prior to entering into the 'global settlement' to compromise substantially all of those claims (including claims as to the ownership of the Trust Preferred Securities), the Debtors had conducted, in the view of the TPS Consortium, minimal (and in some cases, perhaps, no) discovery or analysis of such claims. Moreover, it appears the Debtors’ attorneys responsible for negotiating the 'global settlement' had potentially disabling conflicts of interest with certain parties who, under the settlement, would receive significant additional benefits, including, without limitation, JPMC."

Bottom line? TPS wants to derail the settlement.

Enough background. Now we're back up to this week. On Monday, TPS filed its "motion to deem all requests admitted." Why should the court "deem" this? Because the debtors have been evading requests for admissions where TPS is, according to its attorneys, entitled to a yes or no answer.

"Debtors’ response is wholly inadequate because it is riddled with boilerplate
objections that cannot be sustained. In particular, Debtors make fourteen general objections (the “General Objections”) to every request and further object to every request as “vague, ambiguous, overbroad and unduly burdensome.”

"Debtors further improperly assert the attorney-client
privilege and work-product doctrine claiming that general facts are privileged."

The requests are, for example, that: "Counsel for the Debtors, Weil, Gotshal & Manges LLP, et al., were the sole negotiators of the Proposed Global Settlement Agreement for the Debtors."

Presumably they are asking this because they want to argue that Weil Gotshal was conflicted, and its conflict of interests should void the settlement. If they were the "sole" negotiators, the route from point A to point B is straighter and narrower.

I'll keep an eye on this.

What is Driving M&A These Days?

2010-08-31T11:32:00.000-04:00

There's an awful lot of merger-and-acquisition activity underway in the US these days. If you wanted to 'play' it in a relatively accessible way you could doso through a merger and arb oriented ETF, such as John Spence discusses in his "Fund Track" in today's Wall Street Journal.

(I'm not suggesting you do any such thing, by the way. The observation was purely hypothetical. My readers are clearly too smart to take market advice from blogs.)

Anyway: what is driving it? Are these directors, eager to build empires? CNBC says not, that it is shareholder driven.

It may simply be that there is too much cash out there. Nobody wants to sit on cash. One wants to put it to work. But over the last couple of years, the idea of putting cash to work has been scary. Buying another firm, one that has a track record or perhaps one with assets that create some synergy with one's own, may be one of the least scary ways to do so.

Sanofi and Genzyme: They'll do it the hard way

2010-08-30T01:18:00.000-04:00

Negotiations for a friendly merger between Sanofi-Aventis and Genzyme, which I discussed here a month ago, now seem to have fallen apart.

Sanofi's CEO has written a "bear hug" letter in the first instance to the Genzyme CEO but in reality to the Genzyme shareholders. The idea is to get the shareholders ticked off that their management is standing between them and a nice pay-out.

Here's a discussion from two and a half years ago about the art of giving a bear hug.

A little history. Back in 2004, a company then called Sanofi-Synthélabo made a 47.8 bn euro for Aventis, a Strasbourg based concern. At first, Initially, Aventis spurned the bid, and a three-month battle resulted. The merger did in time come about, but the price increased, from the original 47.8 billion to 54.5 billion euros.

The French government played a big role in that imbroglio. The government was concerned that a Swiss company (Novartis) would step in as Aventis' white knight if Sanofi-Synthélabo didn't raise its bid. That would lead to Aventis falling under the control of foreigners. Indeed, non-EU foreigners! (The Swiss are only geographically part of Europe.)

The lesson: there is good reason, based on their fiduciary obligation to their shareholders, for the management of Genzyme to make this difficult for Sanofi. They shouldn't make it impossible, but they should make it difficult.

From Both Sides of the Chunnel

2010-08-29T01:09:00.000-04:00

The Brits have fined the UK branch of Societe Generale 1.58 million pounds [US$2.44 million] for failure to file acciurate reports on transactions that occurred between November 2007 and February 2010.

Some of the transactions weren't reported on at all, others were treated inaccurately.

The FSA said the failure was branch was "a serious breach of our rules as it can have a damaging impact on our ability to detect and investigate suspected market abuse.”

This fine has nothing to do with Jerome Kerviel, but I thought I'd mention him, because no story abouyt SG is complete without some such mention.

By the way, Kerviel has a book out, L’engrenage: Mémoires d’un Trader (Gears: Memoires of a Trader). There seems as of yet to be no English language edition.

A Potash Auction?

2010-08-25T10:14:00.003-04:00

The giant Anglo-Australian mining concern BHP Billeton (LSE: BLT) -- which has a stock symbol that reminds me of a sandwich -- has bid $38.6 billion for Potash Corp., of Canada, and has also put on something of a charm offensive, seeking to persuade Canadians that locals will continue to run the place.

Canadian regulators have taken a permissive attitude of late toward foreign companies who want to take over the mining concerns of the Great White North. Xstrata, of Switzerland, bought Falconbridge (a nickel miner) without a fuss, for example.

Anyway, the key question here is: how much will Potash go for? Can the incumbent board set off an auction? You need more than one bidder for a good auction. Potash is apparently in discussions with a couple of Chinese concerns: the Sinochem Group and Hopu Investment Management.

As you can see from the chart, the course of BHP's stock price has been pretty rocky since April. Nonetheless, the company has deep pockets, and analysts are convinced it can sweeten its offer if it has to.

Indeed, Marius Kloppers, the CEO of BHP, has referred to the bid -- which stands at US$130 per share, as "full and fair." If he had wanted to say "last and best," he would have done so.

Penn and Teller

2010-08-24T00:09:00.001-04:00

The famous magicians -- the one who talks and the one who doesn't -- have their own program on Showtime called Bullshit! In which they seek to expose various forms of, yes, Bullshit.

Recently, they did an episode of that program on multi-level marketing. The above link will take you to a collection of clips from it. The next link will take you to a blog specifically devoted to expansive treatment of some of the issues that P&T could but raise.

I whole-heartedly agree with the gist of the Penn & Teller critique of the whole practice. I wrote about this in May specifically in the Medifast context, but it bears repeating.

The Amway case, and its 70/30 rule, have given a cloak of legitimacy to an industry. But, in my view and that it seems of most of those who have looked at the matter dispassionately, the distinction between lawful MLM and unlawful pyramids is itself something of a sham. MLM systems as defined above inevitably create a context in which the success stories are the sales people at the top of the chain, and those at the bottom are their suckers. The success stories are held up as role models, and this is used to generate more suckers.

Just to be fair to that company, here's the official site for Medifast.

And just to be fair to potential suckers thereof, here's a contribution to discussion of their business model by Barry Minkow.

Who is Barry Minkow? This may jog your memory.

Marketing Gases

2010-08-23T00:53:00.001-04:00

The Airgas annual meeting is set for Wednesday, September 15.

Airgas, based in Radnor, Pennsylvania, sells gas to industrial and commercial users.

Air Products, another firm in that field, has offered to acquire it, but Airgas management is resisting.

But you've read that much before. What's new?

Just this: Air Products sent a fairly entertaining letter to its rival's shareholders on August 19 detailing what it calls the "numerous inconsistencies and misstatements regarding our bid.

Intel and McAfee

2010-08-22T01:45:00.000-04:00

I don't get it. Where is the synergy here?

Here's an effort to explain it

But a company known for making chips is buying a company that offers protection from viruses. It is not at all obvious that the one provides any support for the other that has to be done "in house," that can not be accomplished just as well through arms-length bargaining between separate entities.

Dell: The Company and the Man

2010-08-18T09:11:00.005-04:00

What is going on with Dell these days?

The owners of 378 million shares withheld their support from Michael Dell's re-election as chairman of the board of the company that bears his surname.

That reminds me of the brouhaha at Disney in the period 2003-2005.

But what is the "big picture" at Dell? My understanding is that its core business remains the sale of "the box," the physical computer you stick on top of your desk. It typically has Intel's chips, and MS software. Furthermore, since the selling of boxes is competitive, whereas both the software and the chip making markets have a single dominant firm each, most of the profit goes to Microtel. Dell's core business has a slim margin.

Accordingly, in recent years, Dell has tried to branch out into non-core areas where it might be less tightly squeezed. Last year, Dell bought Perot Systems, a provider of a wide range of IT services.

There's also this.

It seems to me that the missteps that led to investor dissatisfaction, and all those withheld votes, have to be understood in this context. Dell is changing course, and there will be some stumbling as a result of such a change. The right thing to do, nonetheless, is to persist.

CEOs and Debt

2010-08-17T01:01:00.000-04:00

We have all become rather accustomed to the fact that executives of a company are often compensated for their services in part by equity in the corporation -- or, in the alternative, by options to buy equity.

Not only does this seem normal, there is a superficially plausible case to be made that it aligns incentives properly. A CEO with stock in the company has "skin in the game," as the saying goes.

There are two sides to that, though. As Roger Lowenstein wrote in ORIGINS OF THE CRASH (2004), "For an incentive to functiom properly, there must be a prospect of pain as well as gain" and the the 1990s dotcom bubble with which Lowenstein was concerned in that book, the very possibility of CEO pain was "trivialized."

Another common complaint about reimbursement through equity is that if executives see themselves as equity holders, they have an incentive to shift wealth away from debt holders, toward themselves and their fellow stockholders. How might they do this? By over-paying dividends, most obviously. If a company is in trouble (in the "zone of insolvency" as lawyers sometimes say, although not across that line yet) and it pays its shareholders a generous dividend anyway, then the company is essentially making sure the shareholders get cash while the 'gettin' is good.' That cash will never be available to pay off the bondholders should the company default and either voluntarily file bankruptcy or be pushed in that direction by debtor action.

So: if executives are compensated in stock, they may have a commonality of interests with their fellow shareholders, but this may express itself not in productive dcisions, but in beggaring other stakeholder groups.

What, then, about compensation in bonds? Perhaps a CEO who really wants to show us that he has skin in the game will load up on debt instruments issued by his company. Here is the recent discussion of that point that has gotten me thinking.

Barnes & Noble settlement talks

2010-08-16T00:32:00.003-04:00

Settlement talks between the parties in the fight over the famous bookstore chain seemed promising early last week. Talks went late into the night on Wednesday. But by week's end, things had fallen apart.

In a brief statement B&N said that it and Yucaipa "were unable to conclude an agreement on mutually acceptable terms."

Yucaipa is an investment company alter ego for Ron Burkle. According to scuttlement, a tentative deal had emerged in which B&N would expand the size of its board of directors by three seats and let Burkle name directors to the new seats. In return, Burkle would support the candidates director nominees for this meeting and the next. He would also stop litigating to try to have B&N's poison pill plan invalidated, thereby allowing B&N to continue in effect to limit the size of his investment in their company.

On Thursday, that tentative agreement unravelled. The parties communicated that to the chancery court in Delaware, and that court issued its ruling on the pending motion to dismiss. Barnes & Noble won the litigation -- or at least this round of it -- in a ruling by Judge Leo Strine.

The "rights plan" a/k/a the poison pill, by the way, provides that if an outside acquires 20 percent or more of the company's stock, other investors get to buy common shares at a 50 percent discount. So Burkle can only pass the 20 percent threshold if he is willing to accept enormous dilution in stock value thereafter.

"The defendants have shown that their adoption and use of the rights plan was a good, fair, reasonable response to a threat to Barnes & Noble and its stockholders," Strine said, dismissing Burkle's lawsuit.

The name of the decision is: Yucaipa American Alliance Fund II LP v. Riggio, CA5465, Delaware Chancery Court.

Blackstone and Dynegy

2010-08-15T09:17:00.001-04:00

The Blackstone Group and Dynegy Inc. have entered into a definitive merger agreement. Dynegy stockholders will receive $4.50 in cash for each of their shares. This is a 62% premium on the closing share price as of the Thursday, August 12.

Separately, but not-so-separately, Blackstone and NRG Energy have entered into an agreement through which NRG will buy four natural gas-fired assets currently owned by Dynegy for a total cash consideration of $1.36 billion. Three of the facilities involved are in California, the other is at Casco Bay, Maine.

The closing of the merger transaction between Dynegy and Blackstone is contingent upon the concurrent closing of the Blackstone and NRG deal.

News involving Dynegy always perks up my ears because Dynegy was involved in the big energy-markets story of 2001, the demise-of-Enron. Dynegy was the white knight who never quite arrived to save the damsel from the dragon of insolvency.

That's an episode that goes unmentioned in the company's official version of its own history. But there is a fine account, with some Dynegy background, in the Smith/Emshwiller book n Enron's fall.

Smith/Emshwiller tell us that the companies jointly announced a merger agreement at 5 PM Houston time, November 9, 2001. "Who would have imagined it? Enron officials had looked down on Dynegy as one of the little kids on the energy block, with assets of a 'mere' $25 billion compared with Enron's more than $60 billion. The planned merger was just one more example of the unintended consequences of the Enron debacle...."

WaMu bankruptcy

2010-08-11T09:55:00.002-04:00

The Delaware bankruptcy court has authorized a study of the circumstances that led to the bankruptcy of Washington Mutual by Joshua Hochberg of the law firm McKenna Long & Aldridge.

This was part of those overly dramatic days of the fall of 2008. The FDIC seized the operating company, i.e. the actual bank, and unceremoniously sold it to JP Morgan Chase. This was all done hurriedly. As Sorkin wrote, "The FDIC typically conducts seizures of troubled banks on Friday evenings, to allow regulators time over the following weekend to readsy the institution to open under government oversight on Monday. But WaMu was deteriorating so rapidly -- nearly $17 billion had been withdrawn in ten days -- that the regulators had no choice," but to run the auction on Wednesday and effectuate the seizure on Thursday.

That didn't involve a bankruptcy court at all. But immediately thereafter its holding company (WMI) filed for bankruptcy protection. All this happened so quickly that no one had a chance to work out which assets belonged to WaMu and which to WMI, so they proceeded to argue that out in court. In a development that may have helped generate some changes in the law, JPMC sought full disclosure of all information called for by Bankruptcy Rule 2019(a), not just the names of the members of the WMI Noteholders Group and the aggregate value of their interests. Following the 2005 decision of the United States District Court for the Southern District of New York in In Re Northwest Airlines Corp., the court granted JPMC's motion and ordered full compliance back in December 2009.

It appears, though that the issue of disclosure in other forms is still bedevilling this particular bankruptcy proceeding.

Anyway, I look forward to an enlightening report from Hochberg.

Geoff Sorbello to Okapi

2010-08-10T00:44:00.000-04:00

Sorbello, who has been with ISS/RiskMetrics, is the new hire at Okapi Partners.

In a statement yesterday, Sorbello said, "During my seven-plus years at ISS, I had the privilege of working with many of the world's best advisors on shareholder rights issues, proxy contests and [mergers & acquisitions]. I look forward to adding to Okapi Partner's existing expertise and stellar reputation."

Okapi is a proxy solicitation firm launched a little more than two years ago -- in February 2008 -- by Bruce H. Goldfarb and Patrick J. McHugh.

At that time, Goldfarb said: "Companies and their investors are increasingly recognizing the need for more proactive strategies and tactics to influence the outcome of shareholder votes. In this environment, Okapi Partners is well-positioned to provide senior-level attention and conflict- free advice to our clients."

I hate the word "proactive," but it seems to be unstoppable at this point anyway.

An urgent question: why do they call themselves Okapi? It's the name of a girafe-like animal. But with a shorter neck. What does that have to do with proxy solicitation. Damned if I know.

Black-Scholes and Monte Carlo

2010-08-09T09:23:00.005-04:00

Aside from the lattice method discussed in yesterday's entry, the two most important methods of valuing the expense of stock options as compensation are: the Black-Scholes-Merton (BSM) formula, and a Monte Carlo simulation.

BSM is here.

This amounts to valuing an option to buy a share of stock by making certain simplifying assumptions. The devisers of the formula were explicit about these assumptions. One of the more important of them is that extreme price changes are very rare, because the movements in the value of the underlying stock follow lognormal distribution. Many scholars have quarrelled with this, but BSM does still offer a useful approximation of the value of such options.

Still: the "Monte Carlo" method has by far the cooler name, paying homage as it does to the city whose image I've uploaded with this entry.

Through the miracle known as a digital computer, modelers can run thousands of simulation paths covering possible price movements in the underlying asset -- the stock - and can assign a value to the option for each of these paths. The present value of the average of all those values is the Monte Carlo value of the option.

More on Stock-based Compensation

2010-08-08T16:25:00.001-04:00

It was only a few flicks of the calender away, it was as recently as 2004, that one could say that generally accepted accounting principles (GAAP) in the United States didn't require employers to recognize in the books they showed the investing public that by issuing stock options to their employees they were incurring an expense.

The move of the FASB that year toward standards explicitly requiring this was caught up in the election-year debates. The FASB held its ground, although if I remember correctly it had backed down under political pressure on the same score a decade before. But the second time around it held its ground and made the expensing of stock options mandatory for all annual and interim reports, effective beginning June 15, 2005.

Over the last few years the nature of the debate has shifted. Now that we know companies are supposed to expense their stock options, the question is: how?

There are three dominant methods thus far. There's the Black-Scholes-Merton (MSN)formula, the Monte Carlo os 'simulation' methods, and the lattice model.

The lattice model is the most intriguing of the three in my eyes so I'll expound upon that a bit.

The modelers start by dividing the time between the issuance of an option and its expiration into a definite number of discrete time periods. These periods might be, for example, months or quarters.

Given input variables and assumptions that the company and its modelers must makle explicit, they can then assign a probability to an "up" and to a "down" move in each period. This yields two (or more, depending on how the particular lattice is constructed) end points, which are then starting points (nodes) for the next jump.

The model continues to generate nodes in an ever-widening pattern, looking a bit like a branching tree turned on its side (because the horizontal axis by convention represents the passage of time) until time runs out; that is, until option expiration.

Modelers then employ the whole lattice to decide what would be the value of an option in the final time segment. It helps that the ending is in a sense binary. Either the exercise price of the option is less than the current stock price or it is not, and that simplicity makes calculation straightforward. From there, one can work backward, step by step, until one comes eventually to a value for the option at time 0.

EBITDA and Stock-Based Compensation

2010-08-04T10:14:00.000-04:00

The acronym "Ebitda" is in the news again.

For the record, this stands for "earnings before interest, taxation, depreciation and amortization," and is sometimes thought a useful statistic as an approximation of cash flow.

Over time, the significance once attributed to the P/E ratio has come to be relocated -- the value/EBITDA ratio is now the important one.

Value, for such purposes, is a modification of the simpler statistic of market cap, or price.

So: why do I bring it up today? Because it is in the news, of late. Two listed companies, Penson Worldwide (NASDAQ: PNSN) and Comtech Telecommunications (NASDAQ: CMTL) have been called out on fiddling with their EBITDA calculation.

Penson has added stock-based compensation into the EBITDA figure, while Comtech has addedf the amortizationof stock-based compensation. Well ... the A does stand for amortization, but not as it happens that amortization.

Of course, if the EBITDA figure itself can be jiggered with in this way, then any ratios of which EBITDA forms a part become less useful for any investors who might be relying on them. If an investor is diligently working out the value-to-EBIDTA ratio, he'll end up with a smaller ratio that he "should" for these firms. Smaller, that is, than he would if the rules were adhered to consistently. That smaller ratio might well lead him to include, "these stocks are at bargain prices."

Sam Antar has done good work bringing these shenanigans to public notice, and I congratulate him on that.

Another way of looking at this story, though is as a new episode in a continuing controversy over how to account for stock-based compensation. On that, I hope to have something to say next week.

Portugal Telecom

2010-08-03T09:53:00.003-04:00

The European Court of Justice (ECJ) has ruled against the largest telecommunications provider in Portugal in a much-watched case that involves the legal significance of "golden shares" within the EU framework.

Portugal Telecom was a legal monopoly in that country until 1994, when the government began privatizing the company and liberalizing the market. But through that period of liberalization, the government wanted to ensure that it would retain a veto right to certain corporate decisions, so it created the "golden shares," -- 500 shares with extended voting rights, effectively allowing it to block a takeover of the company by outsiders.

Here's a link to a discussion, by Jaron van Bekkum, who professes himself baffled.

DWS Enhanced

2010-08-02T10:01:00.000-04:00

On July 29 the board of directors of DWS Enhanced announced that at the annual meeting of shareholders July 22 three things happened:

a) the board's proposal to merge the fund into DWS Enhanced Commodity Strategy Fund received approval
b) none of the nominess for director "received a sufficient number of votes to be elected" despite the presence of a quorum.
c) a proposal presented by Western Investment LLC to end the IM agreement between DWS Enhanced and Deutsche Investment Management Americas failed.

See here for some background.

So, if nobody was elected to the board: who is running the show? According to the post-vote press release, "[T]he incumbent Class I Directors, Dawn-Marie Driscoll, John W. Ballantine and Henry P. Becton, Jr., and the incumbent Class III Directors, Rebecca W. Rimel, Paul K. Freeman, William McClayton, William N. Searcy, Jr. and Robert H. Wadsworth, will continue as Directors until such time as their respective successors are duly elected and qualify."

Not sure what that means.

Crown Crafts' CEO

2010-08-01T08:00:00.000-04:00

The Crown Crafts annual meeting is set for August 10.

Crown Crafts is a Louisiana based marketer of products for babies and toddlers: nursery decor, burb cloths, bibs, and so forth.

The dissidents, led by the Wynnefield Group, have claimed that the CEO of Crown Craft, Randall Chestnut, has a "history of long non-publicly explained absences from the Company."

Even when Chestnut had heart bypass surgery, the company says, he was only out of the office for two weeks. As for the present, "he is in great health and remains totally immersed in running the business."

Wynnefeld has also expressed concern that "there is no publicly disclosed succession plan to address the possibility of the CEO being unable to carry out his duties or obligations."

Crown Crafts has rebuked them for that is well. They do have a plan, and there is good reason it has not been publicly disclosed. Nobody does that.

"[In]line with long-established corporate governance best practices, no public company board, to our knowledge, discloses its carefully constructed succession plan outside the board room."

Blah and counter-blah. I'm just passing it along today folks. Go hit the beach, if you live anywhere near one. Or a good pool, otherwise.

Financial Accounting Standards Board

2010-07-28T03:53:00.003-04:00

The FASB recently issued an exposure draft on new accounting standards concerning litigation contingencies.

The gist of it is that companies who are the defendants in lawsuits will be required to disclose the contentions of the parties and tell the end-users of the financial statements how they can obtain further information on point.

The proposals would require disclosure of publicly available quantitative information, such as the claim amounts, other relevant non-privileged data, and in some cases filers would disclose how much they would be entitled to draw from insurance and other sources against a judgment.

This is hardly the board's first look at the issue. The FASB put out a draft in June 2008 (which only SEEMS like twenty years ago!). This draft attempts to address some of the criticisms that were levelled at that one.

Nonetheless, I'm sure this will be a bone of contention in the accounting/auditing world for a long time yet.

Three brief items

2010-07-27T04:45:00.001-04:00

1. Auction for Genzyme?

Genzyme Corp., a biopharm company based in Cambridge, Mass., has rejected a takeover offer from Sanofi-Aventis, the largest drug manufacturer in France.

According to a Bloomberg story, the discussions thus far have been informal, but "Sanofi may send a formal letter to Genzyme detailing its interest in an acquisition as soon as this week."

Genzyme has had the pleasure of Carl Icahn's company for some time now. Icahn curently controls two seats on the board. Icahn will surely make his views on the subject known if this does play itself out over the weeks to come.

GlaxoSmithKline is also sometimes mentioned as an interested party, so a real auction for Genzyme is a possibility.

2. Higher cross-border bid.

Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, has increased its bid for Casey's General Stores. It was bidding $36 a share in April and has now raised that to $36.75.

This values Casey's at $1.9 million, including debt says DealBook.

The offer expires at 5 PM on August 6 -- which, it so happens, is my baby sister's birthday. (Hello, Beth!)

Oh, and perhaps I' naive, but this strikes me as odd.

3. GSI Group Emerges from Chapter 11.

GSI is a multi-national family of companies that supply parts ("precision technology") to the medical, electronics, and industrial markets. Parts that, so far as I can tell, involve lasers.

Three of the entities within this family filed for chapter 11 reorganization in November 2009, in Delaware: GSI Group Inc., the parent Canadian holding company; GSI Group Corp., of Massachusetts; and MES International, Inc., a non-operating subsidiary of GSI Group Corp.

But now they have returned from that legal world of the undead to that of the truly living.

The Boston Business Journal, in May, described the descent into bankruptcy as
"a slew of regulatory and accounting setbacks that stemmed from revenue-booking practices between 2004 and 2008."

That got me curious, so I went here. Seventeen months ago, and eight months before its bankruptcy filing, GSI announced the results of an internal accounting probe and admitted to material revenue-recognition errors.

Bankruptcy and Dodd-Frank

2010-07-26T03:48:00.000-04:00

Does the new Dodd-Frank bill have anything to say about corporate bankruptcies?

Yes, and to say myself the trouble of paraphrasing, I'll simply link you to a fine listing of direct and indirect consequences.

None of it seems to address the core dysfunction of our corporate bankruptcy system, though.

Back in March 2008, Judge Posner, of the 7th circuit court of appeals, suggested the key dysfunction -- out-of-control bankruptcy trustees. Posner wrote, “While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce.”

In particular, trustees had become very aggressive by that time (BEFORE the worst of the credit crunch that autumn) in pressing claims for fraudulent conveyance. The result was that counter-parties to any institution that might even have been close to bankruptcy, which may even be rumored to be close to bankruptcy, have got very jittery. Why set one’s self up to be the defendant in a lawsuit brought by the next aggressive trustee?

It was and still is a legal climate that encourages “runs on the bank,” and that is what we have gotten.

It is more than a pity that neither Dodd nor Frank nor any of the many cooks that shared the legislative kitchen creating this crazy soup saw fit to address that problem head on. It is more than a pity, it is a symptom.

Proxy Contests and the Dodd-Frank bill

2010-07-25T10:29:00.004-04:00

Back in the 1980s, hostile corporate takeovers received a lot of attention, and several states decided that they ought to protect their homegrown corporations' managers from outsider threats.

Naturally, these laws were themselves challenged on the ground that they impinged upon federal jurisdiction, either as actually expressed in federal statute or in more dormant form.

But the Supreme Court of the United States upheld one such law, and upheld the bunch of them by implication, in a case arising out of Indiana, CTS Corp. v. Dynamics Corp. (1987).

The Dodd-Frank bill, which contains several provisions that speak to proxy contests, represents the continuing federalization of the field. So, is CTS Corp. v. Dynamics still good law? Or is it ripe for a challenge?

Here is a related discussion by Professor Bainbridge, written just before Dodd-Frank became the law of the land.

Bainbridge quotes in that blog post an article he wrote in 2003, with the then-new Sarbanes-Oxley Act in mind. At that time, he said: "No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth."

Possibly it does. But at some point the duplicative regulation by both feds and states becomes itself enough of a drag that the gains one might get from "competitive federalism" are lost. It is at this point that preemption is supposed to kick in.

After Sarbanes-Oxley, and now after Dodd-Frank: are we there yet?

On the Road

2010-07-21T01:39:00.000-04:00

I'm traveling today. This entry is something I cooked up last weekend so it would appear on this date. I don't usually do that sort of thing, but such is life.

Tomorrow, July 22, will be the meeting of the shareholders of the DWS Enhanced Commodity Fund, a fund controlled by Deutsche Bank AG.

In recognition thereof, I'll simply provide you with a quote from a recent filing from Western Investment LLC on the subject of that meeting and how it came to be scheduled for that date.

"By now you probably received the latest "fight" letter, dated July
6, 2010, from the fund's chairman, telling you he adjourned the
June 28, 2010 annual meeting of shareholders to July 22, 2010, and
blaming Western. Don't be fooled by this dishonest letter.
This long-overdue GCS annual shareholders meeting (the last one
was held in 2008) was convened as scheduled on June 28, 2010. A
quorum was present, and all business on the agenda could have been
conducted, including voting on the resolutions to terminate
Deutsche Asset Manager as the fund's investment adviser and to
approve the merger of GCS into an open-end Deutsche fund. Vote
tabulations available to both sides in the proxy contest, as
reported by Broadridge Financial Solutions, Inc. showed that a
majority of the fund's shares outstanding had voted "FOR" approval
of the merger and that approximately 2/3 of the shares present at
the meeting had voted "FOR" termination of Deutsche.
But the board adjourned the meeting to July 22, 2010 without
allowing any of those votes to be counted officially."

Barnes & Noble trial

2010-07-20T01:47:00.001-04:00

I'll just linkfarm today.

The trial in the Barnes & Noble poison pill case is underway.

Corporate managers aren't usually eager to pick fights with their second-largest shareholder. But of course nothing is business-as-usual that involves Ron Burkle, the adversary-shareholder in question.

Burkle, the "grocery billionaire" who shows up in stories about the Clinton family, had enough juice to get Jared Paul Stern fired from the Post back in 2006. But, it seems, not quite enough juice to have Stern to get him prosecuted.

That Jared is not to be confused with this guy.

Anyway, the present excitement concerns Barnes & Noble, in a trial before Chancery Court Judge Leo Strine.

Burkle claims that certain directors are engaged in a “self-dealing scheme designed to entrench the Riggio family.”

Go at it, Rock'em, Sock'em robots!

Greenlight: Shorting Moody's Was A Good Idea

2010-07-19T01:07:00.001-04:00

I'd like to thank the good folks at Dealbreaker for bringing to my attention a "Dear Partner" letter from Greenlight Capital, reviewing the unlamented but departed second quarter of 2010.

Greenlight has made some gains for its investors, though they are as the letter acknowledges far from spectacular. There are three partnerships involved, and the year-to-date returns on the three are 1.6 %, 2.2%, and 0.8%.

Greenlight professes to have "no idea" what will happen in the economy in the second half, and to be maintaining "a conservative and defensive portfolio, with a small net long position throughout."

What were their two best plays during the second quarter? They own some gold, and it has appreciated nicely. That's first. The second, and only other "significant" winner, was a short position on Moody's Investors Service (MCO).

Moody's took a hit, the letter explains, because the "proposed financial reform bill raises the rating agency legal liability more than the bulls expected." Of course, the bill itself didn't pass in time for the effects of its passage to be felt in the second quarter numbers. So, filling in the blanks a bit ... we can infer that as the likelihood of passage of the Moody's-impairing provisions became obvious, the stock price fell in anticipation of the legislation, and Greenlight locked in its profit from this short position during the quarter.

I've included a one-year stock chart of Moody's. The stock's price has hit its recent peak near the end of the first quarter. It was $30.26 on March 22. It went on a long slide at that point, bottoming out at $18.89 on May 31. So, yes, shorting was a good idea.

As it happens, it is the courts that decide what does or doesn't violate the first amendment, not the Congress. So insofar as the amendment has provided Moodys with a defense in the past, it might continue to do so. In that case, we may someday judge that the market over-corrected.

"Buy on the rumor, sell on the fact" -- may in this case translate, "sell on the threatened legislation, buy on its passage."

Usual disclaimer: THIS IS NOT INVESTMENT ADVICE! Don't buy or sell any damned thing because any blogger says so. Emphatically including me.

Still, Moody's may have an intriguing future.

The Second Circuit on "willfulness."

2010-07-18T10:28:00.006-04:00

Mark P. Kaiser, once the marketing chief for U.S. Foodservice, received a seven year sentence in 2007 for his role in a securities fraud that, according to the prosecution, overstated earnings by $800 million between 2000 and 2003.

Here's an AP report on the sentence at the time.

Kaiser appealed his conviction on several grounds, one of which was that under 32(a) of the 1934 Exchange Act, contrary to the usual bromide, ignorance of the law is an excuse. Section 32(a) of the Act criminalizes only "willful" violations of most of that Act's provisions. See p. 264 of that PDF.

The good news for Kaiser is that he won his appeal and his conviction has been vacated.

But he did not win on the willfulness theory. He won because the trial judge failed to give a crucial instruction on another issue.

The court -- a panel of the 2d circuit Court of Appeals -- was unimpressed with the defendant's contentions on the statutory meaning of willfulness -- and indeed apparently unimpressed with its own precedents on this point. Solomon Wisenberg at the White Collar Crime blog explains it well, here.

Brown and Snowe on Board with Dodd-Frank

2010-07-14T04:12:00.003-04:00

This huge Rube Goldbergian contraption seems finally on the verge of becoming a law.

Senators Scott Brown and Olympia Snowe, of Massachusetts and Maine respectively, say that they are now on-board, which should give the bill's proponents the votes they need to overcome any filibuster.

Byrd's replacement? That is still an unknown. Governor Manchin has the power to make the appointment, and he is taking his time. Some announcement is likely this weekend.

Still, the Dood-Frank bill should come to a vote tomorrow, Thursday, even with that seat still empty. The Democrats, it appears, don't need that vote. They have, with Brown and Snowe and one other, a total of three Republican votes, and if they stay together as a party that should do the job.

This blog has been following the developments regarding this legislation for months. There was, for example, this observation last month about the fiduciary-obligation issue, and this one about the Volcker rule.

Going back to January, I wrote about the ambivalence of the President on these matters.

But here we are. It will probably be a done deal tomorrow. A small part of it is the "Collins amendment," a provision that would, after a three-year phase-in beginning on January 1, 2013, eliminate Trust preferred securities as Tier 1 capital for bank holding companies that had $15 billion or more in assets as of December 31, 2009. Where do you think that third Republican vote comes from? In the name of this amendment lies a clue, grasshopper.

This could all result in certain bank holding companies having to raise significant amounts of new Tier 1 capital. And that, in turn, (as the Wachtell Lipton law firm asserted in a memo they sent out yesterday) could result in significant capital structure inefficiencies.

That is just one of many respects in which this bill just seems to be a flailing-of-the-arms by politicians who don't have a clue what to do, but who feel strongly that they ought to do "something". Beware always the siren call of doing "something"!!!

Reactions to Bilski

2010-07-13T04:48:00.000-04:00

Although I discussed the Bilski decision, the latest effort by the Supreme Court of the United States to reconcile patent law with the digital world, in this blog two days after it was issued, I'd like to return to the subject now that the dust is beginning to settle, to look at what the rest of the blogosphere is saying.

Matt Lee, writing for the Free Software Foundation, is both ecstatic and wary.

On the one hand, the ruling "undoubtedly represents a breakthrough," and on the other "software patent attorneys are formulating new incantations...."

Yes, that is their job. Also, the ad hoc nature of the court's opinion rather encourages them to get to work on those new incantations.

Rob Tiller, writing at OpenSource, and with the same PoV as Lee, takes a different, more lawyer-like, tone. Tiller is content that the court "followed the traditional methodology, and addressed only" the fact pattern immediately before it, "the issue of business method patents." When it does get to software, he says, it will find that "the rationale for invalidating the Bilski patent is one that could easily be applied to void some software patents."

Erik Sherman at BNET reports that he recently spoke to one of those tricky patent attorneys Lee mentions. Sherman spoke to Scott Bain, litigation counsel of the Software and Information Industry Assn., who said: "Things are pretty similar if not the same as before Bilski. The Supreme Court decided this single case on these facts, but didn't give much guidance on how other cases will come out."

Meanwhile, the Patent Office is trying to explain the ruling to its own examiners. In essence, their instructions are to stick to the machine-or-transformation test "as a tool for determining whether the claimed invention is a process under section 101."

Steven Seidenberg, of Intellectual Property Watch, gives us a suitable final word.

"The ruling, it appears, will keep patent litigators in the United States very busy for quite some time."

SEC Notice to Amedisys

2010-07-12T01:48:00.003-04:00

Amedisys (Nasdaq:AMED), a provider of home health care nursing services, said on June 30 that it has "received notice of a formal investigation from the Securities and Exchange Commission ... pertaining to the company, and received a subpoena for documents relating to the matters under review by the Senate Finance Committee."

Amedisys, which is run out of Baton Rouge, La., also said that it will cooperate with the investigation.

Back in April, the Wall Street Journal ran a story that strongly suggested abuse of the Medicare reimbursement system by Amedisys, the largest company in the sector.

Sam Antar makes the case that the WSJ report wasn't as hard-hitting as it could have been.

Going back a bit, I should note that in September 2009, the president and chief operating officer of Amedisys, Larry Graham, resigned those posts suddenly. So did Alice Ann Schwartz its Chief Information Officer.

The company didn't give any reason for these departures. Not even their desire to spend more time with their families. Just a bald, "...to pursue other interests." That sort of thing is always ominous.

The U.S. Senate Finance Committee investigation to which the company referred in its statement involved four companies in the field. In addition to Amedisys, the Senate was curious about Almost Family Inc., Gentiva Health Services Inc., and the LHC Group, and their "internal policies and guidelines regarding the number of visits provided to each patient...."

Airgas

2010-07-11T17:19:00.000-04:00

More must be said about Air Products versus Airgas.

AP is now offering to buy its rival at $63.50 a share, but the market is valuing Airgas at a premium above that. You can see this for yourself in the chart nearby, reproducing the trading from Friday, July 9.

Both companies provide gas to industrial and commercial users. Among others, these users include refineries, which 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.

Airgas, based in Radnor, Pennsylvania, has said this: "This Board has unanimously concluded that Air Products’ unsolicited tender offer and proxy solicitation for its hand-picked nominees are an opportunistic attempt to advance Air Products’ goal of transferring the value of Airgas to Air Products at a grossly inadequate price.

"The Board continues to recommend that stockholders reject the Air Products offer."

Here is what BusinessWeek has to say.

SAP versus Oracle

2010-07-07T09:35:00.005-04:00

I'm going to channel my inner IT nerd today.

The German software giant SAP AG and the US/California based Oracle are competitors on a range of products, but none more intensely so that in ERP, (or, for the uninitiated, Enterprise Resource Planning). The Californians have a better name, in that it evokes the image I have displayed here. The word "sap" evokes an image in English too, but I don't think its something the Germans were going for.

Here's a link to a general commentary on the rivalry from back in 2006, and here is something more recent.

SAP's original business plan was to conquer the then-new ERP market, whereas Oracle seems to have bumbled into the field half by accident, through a series of acquisitions. They are an aggressive second-place runner, like "Avis" back in the day when there were only two rental car companies that counted, and Avis used to advertise: "We're number two. We try harder."

Here's a link to an issue of InfoWorld from August 1998, those golden days of the dotcom madness. Look at the column on the left, "ERP & Services Briefs." SAP's ERP suite was dominant, and other software companies were working to integrate with it in offering related services. But (says the second graf of that column): "versions for other ERP suites, such as Baan and Oracle, are in the works."

Oracle, as I've noted, has since made a big splash in this pond. What happened to Baan? That is a fairly tangled story, worth a separate entry.

So: what's my point? Only the old one that competition is good, even if it is only a duopoly. Keep it up, guys!

Situation Awareness???

2010-07-06T09:43:00.001-04:00

Right off of PRNewswire recently, I see a story about an agreement settling a proxy contest involving Ezenia! Inc. (OTC BB: EZEN).

What caught my attention is the release's description of the business that Ezenia-with-exclamation-point is in. It is a "leading market provider of situation awareness." Doesn't "situation awareness" sound a bit too much like a new age therapy?

Anyway, its a biz-software goal.

So, for the record, the annual meeting (which will now, given the agreement, be a love fest) is scheduled for July 26. The now-mollified dissenters were a stockholders' group led by North & Webster, a value fund,
and N&W has agreed to withdraw its shareholder nominations. It will "cease all efforts to nominate or elect its nominees to the Ezenia! Board of Directors in connection with the 2010 annual meeting."

What did N&W get in return for its amiability? It will "have the right to appoint Samuel A. Kidston or another nominee to the Board in January 2011 in the event that Ezenia! does not meet the revenue and operating income targets in its operating budget for fiscal year 2010."

Insider Trading Case: AKO Capital

2010-07-05T07:56:00.001-04:00

A London, England court has sentenced a former trader at a hedge fund there, AKO Capital LLP, who has pleaded guilty on insider trading charges. The trade, Anjam Ahmad, must pay about 287,000 pounds ($421,000) in fines and restitution.

There are as many as twenty two different companies involved in the trades that are the subject of the prosecution.

Judge Geoffrey Rivlin suspended his sentence, so and Ahmad, who is 39 years old, will serve no jail time.

Judge Rivlin at the sentencing June 22 said: "You cooperated immediately with the authorities and were very frank about the part you played in all this.”

The Financial Servcies Authority (FSA) has gotten a good deal more aggressive in such matters recently. Regular readers of this blog will probably understand that I believe that is unfortunate not only for Ahmad but for the economy and general public of the British isles.

Regulators and prosecutors are interested in trophies they can put on their walls. They aren't interest in what is best for the people paying their salaries. It isn't in their job description to be interested in what is best.

Upek Gives Up on Authen Tec

2010-07-04T04:11:00.001-04:00

Happy independence day everybody.

It is appropriate to mention that Authen Tec seems to have won its own continued independence.

Authen Tec a company headquartered in Melbourne, Florida, though I understand it has a parent corporation in Shanghai, China. It creates "smart sensor" products. This appears to mean that it sells components to computer manufacturers that allow those products to use smooth touch pads, rather than such grosser doohickies as track balls, mouse buttons, or joysticks.

Upek, a privately held company headquartered in Emeryville, California, is one of its rivals, and has long sought a combination. Under the Upek plan proposed in Januray of this year, stockholders of each company would have ended up with 50% of the stock of the combined entity, and the new entity would have been listed on the Nasdaq Stock Market.

Upek had combined its merger proposal with a proxy solicitation campaign. But it has now given up on both.

The catalyst for this decision was the resignation of Robert E. Grady from the Authen Tec board. As near as I understand, Grady was their friend on the inside. Yet he is now gone.

"My decision results from my increasing discomfort with the Company's de facto embrace of the status quo, and tolerance of management leadership's actions to resist value-creating transactions," Grady said as he left.

Anyway, Upek, while applauding Grady, has given up its own efforts at soliciting proxies or otherwise inducing a merger.

Upek and Authen Tec have also engaged in patent litigation, which is virtually inevitable nowadays among two firms both working within such a highly technical field.

SCOTUS on Bilski

2010-06-30T01:29:00.002-04:00

The Supreme Court of the United States decided a much-watched patent-law appeal on Monday, as part of its wrap-up of this term.

The Bilski case, as regular readers of this blog will remember, involves an effort to patent an "energy risk-management method" -- in essence, an application of the familiar idea of commodity hedging.

That would seem to fail under the non-obviousness test. But obviousness is the dog that hasn't barked here. The Bilski case has been litigated almost entirely with reference to what is or isn't a "process."

The Court of Appeals upheld the Patent Office. Both said that the law does not authorize the patenting of an abstract idea, and that 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 is known as a matter of shorthand as the machine-or-transformation test.

The Supreme Court has now agreed with every other authority who has looked at the matter in rejecting the notion that Bilski should have a patent on commodity price hedging. But it also rejected the machine-or-transformation test as an answer to the question "why not?". Nor has it substituted any alternative test of its own as to what is a "process" in the relevant sense.

The brief the government -- via solicitor general Elena Kagan -- submitted to the Supreme Court on this matter, asked the court to uphold machine-or-transformation.

The software industry was concerned about this. Software is designed to run on a very general sort of machine, but to read machine to include any digital computer might allow for the patenting of very abstract ideas anyway, precisely what the phrasing is supposed to avoid. The Court of Appeals had refused to address that point: "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."

Kagan's brief on appeal to SCOTUS acknowledged that the software industry was unhappy about the test she was embracing. But she took the view that reference to a digital computer is not enough to create patentability, so most software would probably not be patentable. The consolation prize for the software industry is copyright law, and "the other legal doctrines that protect non-technological commercial activities," trademark law, common law notions of contract and tort, etc.

Again: although SCOTUS ruled against Bilski, it did not do so for the reasons the circuit court, or solicitor general suggested. Referring to amici briefs it had received from the Business Software Alliance, the Biotechnology Industry Organization, and the Boston Patent Law Association, Judge Kennedy writing for the court agreed that the machine-or-transformation test would create unacceptable uncertainties in the software industry.

More generally, in the course of applying such a test, "courts may pose questions of such intricacy and refinement that they risk obscuring the larger object of securing patents for valuable inventions without transgressing the public domain." Let's keep our eye on the ball, then! But Kennedy produces no alternative test, except that the courts below should reason by analogy to its various precedents such as Flook, Benson, Diehr, etc.

A group of four concurring Justices (Stevens, Ginsburg, Breyer, and Sotomayor) put forward their own views. They too agreed that Bilski tried to patent an unpatentable abstraction. They also agreed that machine-or-transformation is nopt a good rule for the meaning of "process." But they did want to give the lower courts more guidance than Kennedy had.

In an opinion written, as a cap to his judicial career, by Justice Stevens, these four argued for a bright-line rule against "business method" patents: "[A] claim that merely describes a method of doing business does not qualify as a 'process' under §101." This rule would overturn a good deal of what has been regarded as established law, going back to State Street.

The State Street case, a 1998 Circuit Court decision that SCOTUS did not review, and which has been very influential since, involved a patent for software used in administering a "hub and spoke financial services configuration." The spokes were investment funds that served as "feeders" of assets into one broader, master fund.

Although the decision in State Street can be read narrowly as upholding the patent on software, it has usually be read as if it upheld a patent on the hub-and-spoke system itself ... a business method. Stevens wants to put an end to that reading of State Street, at least, and to patents issued on that basis.

"If business methods could be patented," he writes, "then many business decisions, no matter how small, could be potential patent violations. Businesses would either live in constant fear of litigation or would need to undertake the costs of searching through patents that describe methods of doing business, attempting to decide whether their innovation is one that remains in the public domain."

The only thing wrong with that passage is the hypothetical construction. Business decisions can be patented, since they have been for several years and Stevens was unable toget the five votes to stop it. Furthermore, for this very reason, business in ther US do live in constant fear of litigation.

Rorech/Negrin victory, Part II

2010-06-29T03:53:00.001-04:00

Let's pick up where we left off yesterday.

Judge John Koeltl has entered judgment in favor of the defendants, Rorech and Negrin, in an insider-trading enforcement action brought a little over a year ago. He ruled in the SEC's favor on the jurisdictional issue, but after that point in the opinion things are all downhill for the agency.

The Judge found, as a matter of fact, that Deutsche Bank has policies in place designed to keep its "public side" employees from obtaining information from its "private side" employees unless they need it and are aware of the importance of confidentiality. Further, the compliance office is to be notified when a "wall-crossing" does occur. Members of the sales force, including Rorech, are on the "private" side of this wall.

Mark Fedorcik, DB's global head of leveraged debt-capital markets (who, I should say at once, was not accused of anything in this matter) plays a critical role in the judge's reasoning, because it was Fedorcik's job, as the judge describes it, to straddle the wall, to "control the flow of information from the private side of the bank to their sales and trading colleagues ... and to potential investors." On the government's theory of the case, Fedorcik shared critical non-public information with his colleague, Rorech, in confidence. Roreck then went and blabbed out of school, to Negrin, who traded on this information.

At the trial in April, Fedorcik testified that he had not initiated any of these "wall-crossing procedures" in the period of July and early August 2006. That is when the bank was marketing VNU's bond offering, which in turn supposedly generated the "insider trading" in CDSs at the heart of the case.

Why didn't Fedorcik initiate any such procedures? A defense counsel asked him whether it was because he didn't believe that he was "in possession of confidential information that was being shared with any salesman?" Fedorcik replied: "That's correct."

Yet on the government's theory Fedorcik was the source of the information. The judge accepts Fedorcik's own account that anything he discussed with Roreck about VNU was already public information, which is fatal to the SEC's case.

As the judge writes, "Information that Deutsche Bank's investment bankers were advising the sponsors on the deliverability issues in general, ands that the sponsors were likely to address the investor demand for deliverable bonds was widely discussed in the marketplace in July 2006."

The takeaway, for investment managers, is that documented walls, procedures related to wall-crossings, anmd so forth are very good. The more thoroughly you can document such matters, the more credibility you buy from a finder-of-fact later if the question arises whether nonpublic information made it across the wall and then out to a trader.

Rorech/Negrin victory, Part I

2010-06-28T09:38:00.005-04:00

The Securities and Exchange Commission's case against Jon-Paul Rorech of Deutsche Bank and Renato Negrin of the Millennium hedge fund -- a case that the Manhattan federal court derailed Friday -- attracted a good deal of attention when it was first filed, in May 2009.

Here is the Reuters coverage from that time, for example.

The man-bites-dog reason for the interest is that this was the first insider trading case involving what had only then become a headline-worthy sort of instrument in the mainstream media, credit default swaps (CDS). In this case, the CDSs' were bets for or against the solvency of a Dutch media company, VNU, which was a client of Deutsche Bank.

The case was a test of a new theory of jurisdiction for the SEC based upon the Commodity Futures Modernization Act of 2000, which extended the SEC's enforcement authority to "securities-based swap agreement[s]."

Here's an analysis that Law360 did in August.

Those of you who have a PACER subscription can read Judge Koeltl's decision dismissing the case Friday. Be assured, there is no charge for viewing opinions. But be warned, this one is 122 pages long.

The Wall Street Journal this morning has headlned it on p. C1 (the prime real estate for real finance wonks -- let the 'casual reader' look to A1!): "SEC Loss Shows Difficulty of Insider Cases," with the byline to Kara Scannell.

Frankly, I think that headline itself exhibits exactly the wrong emphasis. (Scannell of course can't be blamed for the headline.) We shouldn't worry about the costs imposed upon the poor SEC as it brings tricky enforcement actions pushing the boundaries of its jurisdiction. They'll be all right, the world is full of porn whereby they can console themselves. We should be concerned, rather, by the individuals whose lives are disrupted by the very act of bringing such a case. Courtroom vindication a year later doesn't give you that year of your life back.

The court conducted a non-jury trial of the case from April 7 to April 28 of this year. It has now issued its findings of fact and of law.

The only good news from the pro-enforcement point of view (never my own) is that the court agreed with the SEC about what Congress had meant to do with that CFMA language I quoted above. Koeltl writes, "[The] CDSs at issue in this case are security-based swap agreements for the purposes of section 206B of the Gramm-Leach-Bliley Act and are subject to 10(b)'s antifraud provisions...."

The bad news for enforcers? He didn't buy anything else they tried to sell him.

I hope to come back to this tomorrow.

Skilling's Partial Victory

2010-06-27T12:41:00.002-04:00

In October 2006, a federal court judge sentenced Jeffrey Skilling, former CEO of Enron, to 24 years and four months in prison. He began serving that sentence later that year, while pursuing his appeal.

The appeal led to a decision by the U.S. Supreme Court Thursday, June 24, in which the Court rejected Skilling's contention that pretrial publicity and community prejudice in the area of Houston, Texas, made it impossible for Skilling to get a fair trial there.

The court did, though, prune the "honest services" statute -- the Byzanrine growth of which has long been encouraged by ambitious prosecutors -- and then determined that if that statute is interpreted as the Court now holds it must be, Skilling did not on the facts on the record commit the crime.

The defense had argued that the court should go further and simply declare the honest-services statute, section 1346, [which criminalizes "a scheme or artifice to deprive another of the intangible right of honest services"] vague for voidness. But the court said that it will not declare a statute void if it can save it by a reasonable construction, which is what it proceeded to do.

As it applies to old-fashioned bribery the "honest services" language seems easy enough to understand. If I accept payment from my employer (i.e. a corporation and its shareholders) to do my job in a careful and lawful way, then accept a payment from a third party to do the job in a careless or illegal way, then follow through on my promises to that third party, one can see how I have cheated my employer.

But the government didn't charge Skilling with taking a bribe from some competitor or speculator who might benefit from Enron's fall. Indeed, the government at one point stiulated that there are no facts supporting such a contention. It accused him of artificially inflating the company's stock price by misrepresentations about its financial condition, and it contended that this was less than the "honest services" his employters were entitled to expect. Since the statute (as the court has now reinterpreted it) doesn't covered that, the convictions that depend on that statute cannot stand.

Skilling's defense team will be entitled to argue on remand that this taints the whole of the case against him, and the government will be entitled to try to sever the counts that it obviously taints from those that (the prosecution will of course argue) it does not affect at all. This litigation will be around for some time yet. With luck, we'll get another Enron trial.

Reverse Mergers

2010-06-23T09:34:00.000-04:00

Roddy Boyd has a fascinating entry on his blog about reverse mergers in the Chinese context.

A reverse merger is a transaction in which the role of acquirer and target are the reverse, in substance, of what they are in form. In the two trans-Pacific cases that especially interest Boyd, a dormant shell of a U.S. company (which, was, nonetheless, exchange listed) formally acquired a Chinese concern. The Chinese company then in essence became the "new" operation, and inherited that public listing.

As Boyd observes, this gives the Chinese concern "a quick route to the deep and liquid U.S. capital markets without the scrutiny and expense of a traditional initial public offering process."

I suspect Boyd is being too cynical about such transactions, though, Personally, I thnk that a clever way of short-circuiting regulations is a good thing, and I'm on the side of the hot-wirers. Of course, it is good to work within the law of both of the countries involved but ... that's the point, isn't it? The reverse merger is a way of working within the law without letting it massage you into a lump.

Meanwhile, Carl Icahn ....

Icahn has recently issued a letter strongly denouncing the management of Lions Gate Entertainment. Icahn's designs on Lions Gate are not news to anyone, least of all readers of this site. Still, the tone is sharper now.

In a letter to "members of the board" dated June 11, Icahn professes himself "truly mystified by some of your actions -- and your inaction -- in the face of the abject failure of the current management team to deliver value to shareholders...."

He also cautions the board against engaging in any "inappropriate defensive acquisition or other transaction in an attempt either to thwart our [tender] offer or to dilute our position following the expiration of the offer. We will not sit idly by if you attempt to employ inappropriate defensive tactics."

Three brief items

2010-06-22T04:25:00.001-04:00

1. Deal Struck at Landry's

Landry's Restaurants Inc., a seafood chain operation, says that Pershing Square Capital Management has agreed to drop its resistance to the buyout of tghe company by its chief executive, Tilman Fertitta.

In order to obtain this agreement, as you mnight expect, Feritta had to sweeten his offer for the 45 percent of the shares of Landry's (LNY.N) that he doesn't already own, up from $24 a share to $24.50 a share. The bidding was at $14.75 a share back in November.

Pershing Square and related entitied own together a little less that 10 perecent of the outstanding shares.

2. Incumbents win at First Franklin

Two incumbent board members at First Franklin Corp., of Cincinnati, Ohio, the holding company for Franklin Savings and Loan Co., have held on to their seats despite a challenge from Lenox Wealth Management Inc.

Also, a nonbinding referendum on the declassification of the board failed to muster the necessary majority.

This fight illustrated one common feature of proxy fights that I believe I have so far left largely undiscussed on this blog: the disputes over what constitutes the relevant peer group. One commonly hears dissidents challenge a management on the theory that it has failed to keep pace with the performance of similarly placed corporations, the peer group. One often hears management deny that assertion -- by defining itself against another peer group.

In this case, Glass Lewis used a small list of other banks as a peer group and came to the conclusion that First Franklin is even with the pack. RiskMetrics used a larger group and said First Franklin is lagging behind.

3. Chesapeake Energy: Say on Pay

A vote at the June 11 annual meeting of the shareholders oif Chesapeake Energy ended with 55.6 percebt approval of a resolution that would provide for regular shareholder advisory votes on executive pay.

Chesapeake, an oil company that, despite a name that smacks of the Atlantic Ovcean, is actually based in Oklahoma City, Oklahoma.

The board of directors' argument against say-on-pay had been the rather lame contention that the company and its shareholders should wait and see what Congress will come up with this year. Or, to quote:

Because the Board is unable to predict whether federal legislation will be enacted or the form it might take, the Board believes that it would be premature for the Company to implement an advisory shareholder vote on executive compensation prior to knowing the ultimate disclosure requirements of the Stability Act or any other federal legislation pertaining to say-on-pay.

I'm not surprised that an argument like THAT failed to carry the day!

Some History

2010-06-21T00:52:00.003-04:00

I've been reading a bit about the background of the Securities and Exchange Commission's rules regarding proxy fights.

There were several high-stakes high-publicity proxy fights in the early and mid 1950s, involving for example Montgomery Ward and the New York Central.

The Montgomery Ward case led for example to an early court test of the right of corporations to stagger their boards of directors. It also led to an ancillary fight over whether funds paid by a stockholder to an agent for the purpose of waging a proxy battle are an "ordinary and necessary business expense."

Such battles inspired a book by David Karr (1918-1979) which proved popular, Fight for control (1956), and that in turn helped focus the attention of the SEC.

Then, as now, the SEC tends to go where the public attention is.

What was the effect of the rules introduced at that time? They made life more difficult for the challenger, and thus easier for the management. Mark J. Roe, Delaware’s Competition, 117 HARV. L. REV. 588 (2004) wrote, "In the 1950s, the SEC federalized proxy contests to make them harder for insurgents to win, moving even before states acted definitively.”

House-Senate Conference Committee

2010-06-20T01:29:00.000-04:00

The conference committee is working on a compromise bill of financial regulatory reform, consolidating the two very different bills that have passed the two chambers of our Congress recently.

The weekend edition of the Wall Street Journal portrrays the deliberations as tiring and tiresome. "After just four days, House Democrats and Republicans appear exhausted. Some have abandoned their jackets. When their Senate colleagues filter in, they sit across the table and stare at their House counterparts like children visiting the zoo."

One of the many issues that it is their duty to discuss is whether brokers are to have a fiduciary obligation toward their customers -- and, oif so, toward which customers. The House negotiators want to order the Securities and Exchange Commission to impose the standard, in the limited set of cases in which brokers offer “personalized investment advice about securities to a retail customer.” They would give the SEC the choiuce whether to extend that obligation to other customers.

Bloomberg's account portrays this as a make-or-break issue from the POV of the House negotiators, quoting Rep. Barney Frank (D-Mass.) “I cannot foresee us giving in on fiduciary responsibility for individual investors.”

Bloomberg also said, in a story on June 16, that Dodd was about to propose a counter-offer some day soon, to the latest House conferees' language on this point. I'm not aware that he has done so yet.

Rich Blake is predicting, with tongue in cheek (I think), that: "Financial reform will pass on Friday July 2, the last news day prior to the long Fourth of July weekend, with Obama, flanked by Senator Chris Dodd and a Republican, possibly Richard Shelby of Alabama, announcing 'America’s independence from Wall Street.'"

Today is Bloom's Day

2010-06-16T00:01:00.004-04:00

In recognition of the day, let us talk about a work of fiction. But not Joyce's immortal re-write of Homer. That would be rather outside our remit. Let us talk, rather, about Jerome Kerviel's imaginary friend.

You remember Kerviel, surely. Back in January 2008, when subprime contagion was already a worry but before all the craziness for which 2008 will be remembered, Kerviel lost 4.9 billion euros belonging to his employer, Société Générale, placing allegedly unauthorized bets on European stock index futures. His superiors there apparently discovered his losses -- overcoming his best efforts to hide them -- on Saturday, January 19. On the following three trading days (Mon. through Wednesday), the bank closed out Kerviel's positions.

Now Kerviel is on trial, breach of trust, computer abuse, and forgery, and his defense is that his trading was not unauthorized after all, that he was no Leeson-style "rogue." Here's a discussion of the issue phrased in the language of the quants.

But now we get to the almost Joycean twist. Kerviel now says he invented an imaginary friend called "Matt," supposedly a rugby loving hedge fund guy. Kerviel would answer questions from a broker, Moussa Bakir, about his trading strategy by saying that the questioned trades were in response to pressure from client "Matt."

Which Matt did he have in mind when he made up that name, one wonders? Damon? Lauer? "Mon ami, Matt, du Spectacle d'Aujourd'hui ...." Anyway, this admission would seem to sink the defense that "my bosses knew it all along."
The Reuters' take is here.

What is left of the defense, I imagine, is the idea that they should have known, and implicitly authorized Kerviel's shenanigans by looking the other way, perhaps pretending to believe transparent lies in the process. Doesn't sound like much of a defense, but it may well continue to delight and instruct, the two great goals of art.

Icahn, Genzyme Reach Agreement

2010-06-15T09:29:00.003-04:00

Icahn and Genzyme had been waging a proxy contest in connection with the annual meeting scheduled for tomorrow, June 16.

Now, though, they have kissed and made up. Genzyme has agreed to increase the size of its board from 10 to 13. One of Icahn's nominees, Steven Burakoff, will fill one of the three new seats. Another one of the three new board members, Eric Ende, was a participant in the Icahn proxy solicitation. The third new appointee, Dennis Fenton, appears not to have an Icahn connection.

Fenton was the executive vice president in charge of operations at Amgen until his retirement from there in 2008.

But back to Burakoff. He is a cancer specialist, teaching oncology at the Mount Sinai School of Medicine, and leading the Tisch Cancer Institute at the Mount Sinai Medical Center.

Dr. Ende, a participant in the Icahn funds’ proxy solicitation, is a former biotechnology analyst with Merrill Lynch & Co. Inc.

Icahn made the usual gracious noises when agreement was reached: “I am always pleased when a proxy fight can be avoided. I believe Drs. Burakoff and Ende will add significant medical and financial expertise to the Genzyme board. I am also very heartened that the Genzyme board recently brought on Ralph Whitworth, a longtime activist, as a director, and announced that Dennis Fenton will shortly be added to the board as well.”

Cross-border spitting match

2010-06-14T10:23:00.000-04:00

Alimentation Couche-Tard Inc., a company popularly known simply as Couche-Tard (from the French for "goes to bed late") is a Canadian convenience-store chain, with a headquarters in Laval, Quebec, and a listing on the Toronto Stock Exchange.

Couche-Tard seeks to acquire Casey's General Stores, an Iowa-based company in the same business. Casey's board refers to this as a “self-serving and transparent attempt by Couche-Tard to take significant value that rightly belongs to Casey’s shareholders.”

Or, as paraphrased by Andrew Willis of the Torontoi Globe & Mail: "Get lost.".

On Friday, Casey's announced that it has filed a lawsuit alleging a market manipulation scheme. From their release: "Couche-Tard had accumulated a stake of 1,975,362 Casey’s shares, which represented approximately 3.9% of the issued shares of Casey’s. Shortly after Couche-Tard made public its offer of $36.00 per share on April 9, it sold almost all of its shares at a price of $38.43 per share. The 1,975,000 shares sold by Couche-Tard on April 9 represented 17% of the total trading volume in Casey's stock during market hours on that day."

Couche-Tard replies: The lawsuit "is entirely without merit and we will vigorously defend against these baseless claims. We are disappointed that the Casey’s Board of Directors has chosen to proceed down this path, which we believe is designed to distract Casey's shareholders from focusing on the real issue – our all cash, premium bid for Casey’s."

My own biases are with Couche-Tard, as the recourse to the courts in such matters is generically an effort to protect an incumbent company from the verdict of the markets. But I am, as always, happy to hear my readers' views.

Inflation at Bay

2010-06-13T01:20:00.002-04:00

Back in November, I was confidently predicting that oil would be worth $115 a barrel by July 1. This wasn't because I expected a roaring recovery and the great demand for oil that would create. It was, rather, because I expected that the "quantitative easing" of two successive administrations used as stimulus and as a way of resolving a credit crunch, would have its usual effect on wages and prices. The world price of crude oil is set in US dollars, and historically the price is a good proxy for inflation.

We are drawing near that date, and it seems obvious that I was wrong. The price has of course fluctuated since November, but the highest point it reached was roughly $87, in early April. It is presently at $74.

Now, it is my firm belief that there is no difference anywhere that does not make a difference somewhere else. So: what difference somewhere else does this make? An increased quantity of dollars should other things being equal reduce their value relative to goods and services (and other currencies). That in turn should have rendered my prediction spot on.

I think I went wrong chiefly by failing to anticipate the European crisis, especially with the southern tier countries, and the consequent debasement of the euro. This has strengthened the dollar. Not just by definition, if the dollar is measured in euros, but by virtue of a flight to safety.

Even the Iranian central bank, presumably staffed by people who believe the US is the Great Satan, is swapping euros for dollars these days.

Inflation has been kept at bay, but the situation remains extremely worrisome.

The mine-safety poster child (MEE)

2010-06-09T05:28:00.001-04:00

What is the latest news on Massey Energy, the troubled mining company? Three points:

1. At the annual meeting on May 18th, the three incumbent directors up for re-election won. They remain on the board.

In a display of hubris, though, the company immediately announced its directors had been "overwhelmingly" elected. The numbers don't bear that out.

2. What has been happening with the price of Massey stock lately? It is almost enough to say that it can be and has been bracketed with recent performance by BP and Toyota.

3. On the other hand, there is always the possibility that it has fallen too far. Short interest is high, which means that should an upward tick begin, a rush to cover could give the upward move momentum.

Nothing I say here is to be interpreted in any way as investment advice.

The Last Days of Lehman Brothers

2010-06-08T16:18:00.001-04:00

CNBC will air "The Last Days of Lehman Brothers" this coming Friday.

Indeed, they'll be running it all evening, in accord with the cable imperative that anything worth broadcasting at all is worth broadcasting a thousand times.

The movie was first aired on BBC last September, a year after the dramatic events portrayed. Here's a YouTube clip, portraying Hank Paulson in a philosophical mood.

I love the viewers' comments beneath that clip, too. What a combined reflection of the Zeitgeist they are.

Cast? Glad you asked.

Corey Johnson plays Dick Fuld, chairman and CEO of Lehman.

James Cromwell plays Hank Paulson, whom you saw in the YouTube clip, talking about the fall of Rome, or the European empires, and now of "us."

Michael Landes plays a fictional character, Zach, an aid to Fuld who also delivers the voiceover narration.

It isn't an A-list cast, but a respectable one. Landes is best known for having played Jimmy Olson in "Lois and Clark" in the early 1990s.

Anyway: Happy viewing.

Penwest Pharmaceuticals Makes Its Case

2010-06-07T09:31:00.005-04:00

Penwest, of Paterson, NY, has a shareholders' meeting coming up: on June 22.

Penwest is best known for a proprietary drug-delivery technology.

The dissident slate has made the following case: The company's most valuable asset is the revenue stream on Opana ER that it receives from Endo, a licensee. The value of that single revenue stream has exceeded the net cap of the company for most of the last year. This indicates, to the dissidents, that company is acting as a drag on value. The dissidents would significantly reduce "headcount and other overhead expenses, which we believe continue to be maintained at levels that are in excess of what is required. Following the Annual Meeting, if our Nominees are elected, we intend to conduct a rapid, detailed review of the Company’s current employee base with the view towards eliminating all positions that are not funded by ongoing drug delivery collaborations or not necessary for the Company’s new operating plan."

How has the company responded? Its materials note that in an earlier proxy fight, Tang and Edelman (the former of Tang Cap, the latter of Perceptive Life Sciences) had a far more drastic proposal: they demanded a winddown of the company. So the incumbents think it a moral victory that Tang-Edelman no longer make that demand. Still, it is wrongheaded (they add) to demand headcount reduction.

"Don't reward this disruption of the progress we are making."

Arcadia Opposing Symex/Accelrys Merger

2010-06-06T11:26:00.001-04:00

Richard S. Rofe, the managing director of Arcadia Capital Advisors, is unhappy about a proposal to merge Symex Technologies Inc. with Accelrys Inc.

These are both research-and-development companies, both headquartered in California and chartered in Delaware. Accelrys certainly has the more intriguing way of describing its work. It is the "producer of various modeling and simulation software for both life and materials science research, like cerius, catalyst, insightll, quanta."

A little googling of those names shows me that Cerius software is used by the Laboratory for Molecular Simulation at Texas A&M. (I will refrain from telling my favorite Aggie joke now.) Apparently, Cerius is "legacy" software," and so is "no longer supported by Accelrys."

Anyway, Arcadia is unhappy because it owns a stake in Symyx and believes Symyx could get a much better deal elsewhere than it is getting from Accelrys. Symex' board acknowledges the receipt of cash offers, which it has called "inadequate, from a financial point of view, considering the price offered in comparison to the terms of the proposed Merger with Accelrys and long-term value which the Merger could provide to Symyx stockholders, and Symyx valuation as a stand-alone company."

In a release, Rofe said: "As a long-term Symyx shareholder, we would be more comfortable with the certainty of cash now rather than be dependent upon the execution risk, integration risk, market risk, and other uncertainties in the current economic environment related to any expected long-term value of the Symyx-Accelrys combination."

Genzyme and the FDA

2010-06-02T01:02:00.002-04:00

The Food and Drug Administration (FDA) has entered into a consent decree with Genzyme Corp. (GENZ), a Cambridge, Mass. based biopharm concern that has been one of the unwelcome objects of the attentions of activist investor Carl Icahn.

Icahn now owns just under 5% of the equity of the company, after having doubled his holdings in the first quarter. This is what I said about Genzyme in January.

In recent days, Genzyme has trumpeted two words from the FDA. First, that it has approval to market Lumizyme (its trademark product, chemically known as alglucosidase alfa) for patients with late-onset Pompe disease. Here's more on Pompe disease.

Second, that it has entered into a consent decree with the FDA, ending a dispute over the company's Allston manufacturing plant. The company said that this gives it "further clarity and certainty in our ongoing improvements to our manufacturing and quality systems at our Allston Landing facility."

Icahn, though, portrays the consent decree as bad news for stockholders, not good. It will bring with it tighter FDA scrutiny. The FDA, he writes in a recent "Dear Fellow Shareholder" letter, "has seemingly lost faith in the company's ability to make important drugs for patients. Why should shareholders not look to recharge the board with strong managerial talent and fresh ideas that can ask the right questions and demand performance?"

The meeting has been set for June 16.

Postscript to the Berliner case

2010-06-01T07:33:00.001-04:00

Yesterday, I was working on what may by the grace of God eventually become my next book.

Some of yesterday's work involved the Paul Berliner case. This was a real-life instance of a short-and-distort scam, i.e. one in which a manipulator drives the price of a stock down by lying about corporate events, for his own quick profit. My point, in discussing Berliner, was simply that short-and-distor does happen, though much less often than is alleged.

My ancillary point was that when it does happen, it unravels rather quickly given normal market forces.

In a lawsuit and a settlement announced on Thursday, April 24, 2008, the SEC claimed that Mr Berliner lied to other traders and institutions through internet instant mesages on November 29, six weeks after the announcement of a definitive agreement betwen The Blackstone Group and ADS that the former would acquire the latter for a price of $81.75 a share.

It is of course routine that during the period after such a deal is made, but before it is closed, the target company's stock trades in a narrow range at a discount to the contract price. The discount reflects the level of skepticism in the market about whether the deal will proceed as planned -- there may be stockholder cold feet or unanticipated regulatory barriers.

In late November, accordingly, ADS's stock price was stuck in a narrow range near $77 a share, or at a stead 6% discount to the contract price. It was in this context that Berliner started sending his messages, claiming that ADS's board was in an emergency meeting "on a revised proposal from Blackstone to acquire the company at $70/share ... due to weakness in World Financial Network -- part of ADS' Credit Services Unit...."

The message seemed plausible, and within a matter of minutes ADS' price fell below the supposedly new contract price of $70. In fact, though, there was no board meeting underway.

Eventually, Berliner was fired, forced to disgiorge his gain of about $26,000, and pay a $130,000 penalty.

Small potatoes? Yes, but still ... one can make no excuses for Berliner.

What intrigues me are two facts. First, the efficient capital markets hypothesis looks pretty good in day-to-day terms, if nbot minute-by-minute. The market saw through the b.s., and rebounded with alacrity.

Even before ADS had had a chance to put out a statement of denial, the price had recovered most of its loss.

Another thing that fascinates me? The deal actually did fall through.

Kenneth Starr

2010-05-31T01:15:00.001-04:00

The Kenneth Starr in the news just now is not the former special prosecutor of the Lewinsky scandal. Nor is he the rapper, Kenn Starr. Nor the country-music singer, Kenny Starr.

No, this is Kenneth I. Starr, a financial advisor to the Hollywood elite. The clients who were at one time or another on his list include: Goldie Hawn; Wesley Snipes; Al Pacino; Sylvester Stallone; Martin Scorcese, and (justifying my use of a great movie poster with this blog entry) "The Bride," Uma Thurman.

It isn't yet clear which of his celebrity clients have lost money. The news so far seems to be mostly a typical Hollywood spin-fest, with every PR agency in L.A. contending that the stars on its list suspected something was up in time, and got their money out of Starr's hands. Uma Thurman is said to have had almost a Kill Bill style confrontation with him to that end!

Here's a humorous take on the subject from The Reformed Broker.

And here's the release from the district attorney on the job Preet Bharara. Bharara? Isn't that how the bad guys in Hollywood movies laugh?

Andrew Stein has been arrested on related charges. Aficionados of the politics of New York City willl recognize that name. Others may want a quick course from wikipedia.

But back to all the spin about how various celebrities didn't lose money because they got it out in time: we'll see. The law can be draconian in the unwinding of a ponzi scheme. A lot of people who thought they got their money out safely may soon face a demand from an estate trustee that they return those funds, as have many in the analogous situation with Bernie Madoff.

Three brief items

2010-05-30T10:02:00.000-04:00

1. Equus Total Return

The incumbents won. Dissidents claim moral victory. Why am I reminded of Calvin & Hobbes? Calvin would claim a moral victory even when Susie turned the tables on him, and of course he could count on the support of one tiger pal.

As I've noted here Equus Total Return is a business development company (BDC) HQ-ed in Houston that trades as a closed-end fund on the New York Stock Exchange.

The Committee to Enhance Equus says: "We also believe that the Company conducted the meeting in a manner intended to discourage personal attendance and voting by shareholders....Despite these concerns about the integrity of the process, we have concluded that further contest of the 2010 board election is not in the best interests of the Company or its shareholders."

2. Greg Meyer

Greg Meyer, a shareholder of Blockbuster (NYSE: BBI), seeks to have himself elected to that company's board.

The meeting is scheduled for June 24, in Dallas, Texas.

Control of the board is not at issue. So far as I can tell, Meyer represents only himself and would occupy just one seat out of seven. The one currently held by Gary Fernandes.

3. Seattle pension fund demand rejected.

Meanwhile, a court has told pension fund managers in Seattle that they should act like big boys and wipe those tears, despite losses in connection with Epsilon Global Active Value Fund II.

The Seattle City Employees' Retirement System had requested a preliminary injunction to force Epsilon executives to provide audited financial statements etc.

The judge, Richard Jones of the U.S. District Court, observed that "SCERS did not contract for transparency" when it made the investment.

Listening to the Shorts: A Book Note

2010-05-26T01:18:00.001-04:00

I've been reading Richard C. Sauer's fascinating new book, SELLING AMERICA SHORT: THE SEC AND MARKET CONTRARIANS IN THE AGE OF ABSURDITY (2010). Sauer was with the SEC for 12 years, and what he said he learned in that time was that short sellers are a valuable resource, whom the agency ignores at its own cost. And at the cost of the public.

Some fascinating material here concerns the case of the Belgian software company Lernout & Hauspie Speech Products NV. The two named gentlemen, Jozef Lernout and Pol Hauspie, founded that firm in 1987, and they took it public in 1995. They specialized, as the name suggests, in speech recognition, text-to-speech conversion, and digital speech compressions.

Sauer writes, "As a foreign company with a U.S. listed stock, Lernout was subject to relatively loose reporting standards....We allow foreign companies to file stale and incomplete information because otherwise they might not grace our markets with their securities, depriving the NYSE of a revenue source, and denying our investors the opportunity to make ill-informed investments in companies they probably can't sue if things go wrong."

It was Marc Cohodes, of Rocker Partners -- and Herb Greenberg, of MarketWatch -- who raised the possibility that something was funny with the company numbers. While looking into the matter, the SEC wanted the help of Belgian authorities so they could get information from L&H's auditor, KPMG Belgium, which was not responding to a nice pretty-please request.

"In the United States, auditors are prohibited from releasing client files without a subpoena or the consent of the client. We badgered Lernout management into providing a letter of consent. KPMG Belgium, however, claimed that wasn't enough to protect it from liability....We asked a Belgian law firm for its opinion and were told the law was unclear. I would eventually form the opinion that all Belgian law was unclear and therefore there is little to be gained from hiring local attorneys." That will be sufficient as a sample of the style in which the book is written.

Many of you probably know the upshot. L&H turned out to be one of the biggest frauds in Europe's financial history: the biggest fraud, until Parmalat came along to take the crown. Cohodes, in short, was vindicated.

Lawson Software

2010-05-25T01:16:00.002-04:00

Carl Icahn says he has acquired an 8.54% stake in Lawson Software Inc.

Lawson, headquartered in St. Paul, Minnesota, is a B2B software concern, with an especially intriguing line of products in the healthcare human-resources field. What intrigues me, to be specific, is the idea that healthcare has human resources needs that in turn have software needs that constitute a niche in themselves.

Indeed, on Thursday, May 20, Lawson announced it had signed an important deal with Life Science Innovations (LSI). The software will help LSI "integrate its human resource functions, including replacing its legacy in-house payroll system with one that helps streamline reporting processes and helps enable access to critical workforce information by employees and managers across the organization," said the release.

Reality is fractal.

Anyway, Icahn has decided that the stocks are undervalued, so he has bought a stake and wants to talk to company management about how it can get that price up. Here's the Reuters story.

Here's the link to the SEC filing, which doesn't tell you anything more than the Reuters story does, but which uses a heck of a lot more words.

Why? Here's one reason why: "In accordance with Rule 13d-1(k)(1) under the Securities Exchange Act of 1934, as amended, the persons named below agree to the joint filing on behalf of each of them of a statement on Schedule 13D (including amendments thereto) with respect to the Common Stock of Lawson Software, Inc. and further agree that this Joint Filing Agreement be included as an Exhibit to such joint filings. In evidence thereof, the undersigned, being duly authorized, have executed this Joint Filing Agreement this 21st day of May, 2010."

Who are the "persons named below"? Here is the full list.

ICAHN PARTNERS MASTER FUND LP
ICAHN PARTNERS MASTER FUND II LP
ICAHN PARTNERS MASTER FUND III LP
ICAHN OFFSHORE LP
ICAHN PARTNERS LP
ICAHN ONSHORE LP
BECKTON CORP.
HOPPER INVESTMENTS LLC
BARBERRY CORP.
HIGH RIVER LIMITED PARTNERSHIP

For a variety of reasons, it is valuable for Icahn to do his business through that wide range of partnership and corporate entities, and each one of them ends up adding to the long-windedness of the documentation.

Ah, Icahn! Ah, humanity!

Carried Interest

2010-05-24T01:00:00.003-04:00

To a tax lawyer or lobbyist, the phrase "carried interest" has a fairly clear meaning: it is the share of the profits of a partnership kept by the general partners by virtue of their performance of managerial services.

Of course, a general partner with managerial responsibilities may also put some of his own "skin in the game," and earn a share of profit on the same basis as does any limited partner ... i.e. any investor. But the issue of "carried interest" involves specifically the portion of his compensation that is designated as a share of profit yet that is earned as a reward for services.

And the issue is this: how is that income to be taxed? Is it a capital gain or is it ordinary income?

Traditionally, carried interest has been taxed at the capital gains rate, which is a considerable tax break for some very wealthy people. This break came about, so far as I can tell, through historic accident, and has been maintained in place for the obvious reasons of cronyism and dealmaking.

There isn't any good resource-allocation justification for this. Back in July 2007 an Associate Professor of Law at the University of Colorado at Boulder, Victor Fleischer, put it this way: "[W]e tax profs are not a group that agrees on much -- there's division in the tax academy about income tax vs. consumption tax, corporate tax vs. full integration, territorial vs. worldwide taxation, whether to have an estate tax." Yet they do agree on this -- "carried interest obviously represents a return on labor, not capital." Further, tax profs tend to believe in a broader base and lower taxes, which also inclines them to oppose a special exemption from ordinary taxation for this particular sort of [managerial] labor.

Personally, I'm against the taxation of income as such, whether the income is from labor or capital. But that does not mean that I'm going to support unwarranted carve-outs from an income tax on behalf of the privileged so long as an income tax is in place.

A lot is going wrong in the world today. A lot of what is going wrong, involves policies of the U.S. government concerning matters of taxation and finance. But this one thing is going right. The capital tax treatment of carried interest seems about to be dumped onto the publishers' slush pile of history.

Penwest Pharmaceuticals

2010-05-23T09:26:00.001-04:00

Tang Capital Management LP and Perceptive Life Sciences Master Fund Ltd. have put forward their nominees for election to the board of Penwest Pharmaceuticals Co. (Nasdaq: PPCO), at the annual meeting scheduled for June 22, in Danbury, CT. Here are five more-or-less relevant facts in the backdrop of that election.

1. The dissidents' nominees are: Roderick Wong, Said Zarrabian, and John G. Lemkey.

2. Tang and Perceptive Life Sciences together control approximately 41.3% of the common stock outstanding. They charge that the Company's "most valuable asset is the royalty stream on Opana ER that it receives from licensee Endo Pharmaceuticals," and that "the net present value of this income stream alone has exceeded the market capitalization of the Comnpany for most of the past year and that this disparity has existed primariuly because the Company is spending the cash flow generated by this income stream on activities that we believe will not generate a positive return on investment."

3. What is Opana ER? It is a pain killer that apparently occupies much the same market space as Oxycontin. Opana ER "contains oxymorphone, which is a morphine-like opoid agonist against a Schedule II controlled substance, with an abuse liability similar to other opoid analgesics." I got that off the webpage of the licensee Endo Pharmaceuticals, which is headquartered in Chadds Ford, PA.

4. Penwest and Endo recently settled a lawsuit they had filed against an Israeli company, Teva Pharmaceutical. The terms of the settlement will allow Teva to begin selling a generic version of Opana ER beginning September 15, 2012.

5. The board of Penwest already includes two members who were put their by the efforts of these same two groups -- Tang and Perceptive Life -- at last year's meeting. I wrote about that here. The three new nominees, plus those two incumbents, would constitute a majority.

Merkley-Levin Amendment

2010-05-19T01:16:00.002-04:00

We have reached endgame. We know the rough contours, at least, of the financial-regulatory reform that will become law this year. See the particulars here.

Among the tweaks pending, there is an amendment on offer from Sens. Carl Levin, D-Mich., and Jeff Merkley, D-Ore., that would re-work the “Volcker Rule,” Paul Volcker's brainstorm re keeping banks from using their deposits for nasty speculative purposes. This is the rule that would prohibit banks from sponsoring hedge funds or from running their own proprietary trading operations.

The Volcker Rule is section 619 in the Dodd bill, S. 3217. The key point is that the only way to ban prop trading is to distinguish between prop trading on the one hand and market making on the other. The Dodd bill simply took it as a given that legislation can't do this effectively, and left that detailed distinction to the regulators. Subject to "such restrictions as the Federal banking agencies may determine," the buying or selling of securities "as part of market making activities, or otherwise in connection with or in facilitation of customer relationships," is not proprietary trading and thus is not banned. Those Federal banking agencies will presumably "know it when they see it" as a Supreme Court Justice once said in another context.

Levin and Merkley aren't satisfied with this, and their language would attempt to take some discretion away from the federal banking agencies. They, too, have a generic "market maker" exception, which they word so as to exclude from prop trading "the purchase, sale, acquisition, or disposition of securities and other instruments ... in connection with underwriting, market making, or in facilitation of customer relationships, to the extent that any such activities permitted by this subparagraph are designed to not exceed the reasonably expected near term demands of clients, customers, or counterparties."

Which means ... what? For an argument to the effect that this is a loosening of Dodd's version of the rule posing as a toughening-up thereof see The Economics of Contempt, an excellent blog in general and a worthy posting on this subject in particular.

Massey Energy

2010-05-18T09:32:00.000-04:00

Massey Energy Company (NYSE:MEE) is holding is annual shareholders' meeting today, at the Jefferson Hotel in Richmond, Virginia. The record date is March 19.

Massey is the owner of the Upper Big Branch Mine in the suitably named town of Montcoal, West Virginia, where an explosion took place on April 5 of this year that killed 29 miners.

A special board of directors panel has been looking into that explosion, and it was expected top release its preliminary report today, but reports are that won't happen -- that the board will simply say it is still gathering information.

Meanwhile Massey announced Friday that it will "actively work toward the declassification of the Board." No action on that point will occur at today's meeting, but "within the next three to six months, the Board of Directors intends to hold a special meeting of the shareholders" to consider the declassification amendment to the certificate of incorporation.

But because of the existing unamended staggering, only three members of the Board are seeking re-election today: Richard M. Gabrys, Dan R. Moore, and Baxter F. Phillips. Each of these nominees Two proxy advisory firms, Glass Lewis and RiskMetrics, have recommended that shareholders withhold any vote for these nominees. If their advice has caught on, and those nominees fail to receive a majority of votes, a recently-adopted rule demands that they submit their resignations (although it doesn't indicate whether their colleagues will accept the resignation once submitted).

Intriguingly, all three of the incumbents up for re-election today serve on the board's safety committee. If these guys are going to continue to lead unruffled directorial lives, then the concept of a captain going "down with his ship" seems to have withered completely away from us.

Oil Tanker Company

2010-05-17T05:07:00.000-04:00

DHT Maritime Inc. is the operating company that owns and leases out a fleet of oil tankers -- the name letters "DHT" originally stood for "double hull tankers," but since at least 2005 they haven't properly stood for anything -- the letters are simply the name.

Anyway, on March 1 of this year, DHT Maritime completed transactions that made it a subsidiary of a holding company, appropriately called DHT Holdings, organized in the Marshall Islands.

Still more recently, DHT Holdings has been engaged in a proxy dispute with MMI Investments, a New York based hedge fund we've encountered before in this blog. It's DHT's largest shareholder, currently owning 9.7% of DHT Holdings' equity.

On Friday, May 14, MMI and DHT have reached an agreement. Here's the filing. The gist of it is that DHT Holdings will expand the size of its board of directors to include MMI's nominee, Robert Cowen.

One of the issues involved in the proxy fight was the question of paying dividends and/or starting a share buyback. Previously, DHT's chairman has said that the company "will certainly consider reinstating the dividend" or starting a share-buyback in the future, but conditions in its industry do not allow for that just now. There's nothing explicit on the dividend/buy-back issues in the peace treaty.

Following Ackman: A Book Note

2010-05-16T09:41:00.001-04:00

Bill Ackman is the protagonist of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Ackman, the founder and managing partner of Pershing Square, even appears with her at at book signings.

I haven't read the book, but for the benefit of others such as myself who are curious about it, here is the link to what seems an informative review.

The book concerns the bond insurer MBIA, and portrays Ackman as the boy who saw and spoke to the nakedness of that particular emperor. Of course, he didn't do this because he was public spirited. He did it because a general public recognition of that nakedness would make him money. Still, he did it and was right.

This proves something of broad importance about speculation and its value in the broader economy. Speculation isn't the enemy. Speculators serve valuable functions, one of which is the ferreting out of information that managerial suits want to hide. When they're good at it, they deserve their monetary rewards. When they're bad at it, they quickly remove themselves from the marketplace.

Richard's book might be worth a read.

Medifast litigation

2010-05-12T07:23:00.002-04:00

Count me among those who are thoroughly convinced that "multi-level marketing programs" are inherently suspect. The Medifast Inc. litigation concerning "Take Shape for Life" is only the latest superfluous piece of evidence.

Multi-level marketing (MLM) programs are those in which a salesperson makes a portion of revenue from sales of the product, but also gets a cut from sales of the product made by those persons whom he/she has persuaded to become salespeople. Such an arrangement is not at law necessarily a fraudulent pyramid schemes. After years of litigation with Amway in the 1970s, the FTC defined the line thus. A MLM business is lawful, and so by definition not a pyramid scheme, so long as the company buys back the goods of terminating distributors, requires the distributors to have sales to at least ten customers per month, and and requires distributors to sell 70% of their products each month to non-distributors.

So "selling" only to those you have persuaded to join the team, who then "sell" to the tier further down, whom they persuaded to join the team, is verbotten. In that case of course the "product" is just a pretext for the chain letter.

The Amway case, and its 70/30 rule, have given a cloak of legitimacy to an industry. But, in my view and that it seems of most of those who have looked at the matter dispassionately, the distinction between lawful MLM and unlawful pyramids is itself something of a sham. MLM systems as defined above inevitably create a context in which the success stories are the sales people at the top of the chain, and those at the bottom are their suckers. The success stories are held up as role models, and this is used to generate more suckers.

Certain MLM systems, such as Amway's itself, appear to last for a long time. That appearance in turn suggests that they are legitimate, and are selling valuable products to the general public. This, though, is illusory. Amway regularly starts new products, which function as new pyramids, and it lets the older pyramids collapse. The reality is not of continuity but of a lot of short-lived schemes sharing a brand name.

So we return to Medifast, and its lawsuit against a variety of people who have made points like that abstractly made in the above paragraphs, but who have made them with specific reference to its "Take Shape for Life" program.

These lawsuits are classic SLAPPS (Strategic Lawsuits Against Public Participation). California has an anti-SLAPP law in its Code of Civil Procedure. In essence this allows for a special motion to strike a cause of action that arises from any act of the defendant (like, say, speaking the truth about MLM) in furtherance of the defendant's right of free speech under the constitutions of the US and of California.

So Medifast has brought a lawsuit, and the defendants have moved that it be striken under the anti-SLAPP law, which in essence requires Medifast to make an early showing that it will "probably" prevail on the merits.

Medifast now seems to be confirming the growing skepticism about MLMs in general, by its delaying tactics in regard to the anti-SLAPP motion. As one of the defendants sensibly enough asks: "If they’re so sure of their claims… and if we’ve told lies about them… and if they can prove it… why not proceed with the anti-SLAPP motions? Probably because the longer Medifast can drag this out and the more they cost the defendants in legal fees, the better their chances of shutting us up (and also shutting up any other citizen who dares to challenge the validity of the multi-level marketing business model)."

Split Verdict at CFS

2010-05-11T07:40:00.000-04:00

CFS Bancorp Inc., the Indiana-based holding company that operates Citizens Financial, held its annual meeting on April 27.

CFS stockholders re-elected the current chairman and chief executive officer, Thomas F. Prisby. But they also rewarded the dissidents, electing John Palmer, managing member of PL Capital LLC, to its Board of Directors.

Follow this link for my pre-meeting discussion of the issues.

Shareholders also ratified the appointment of BKD, LLP as the Company's independent public accounting firm for the fiscal year ending December 31, 2010.

"We congratulate Tom Prisby on his reelection, and look forward to working with John Palmer to continue our efforts to further the interests of all shareholders," said Gregory W. Blaine, lead independent director of CFS Bancorp, Inc. "Despite the economic headwinds we continue to face, we believe we are on the right path to enhancing shareholder value over the long term and remain committed to executing our Strategic Growth and Diversification Plan."

And follow this link to get an inkling of an earlier adventure of Mr. Palmer's, in the same field, the exciting world of bank equity.

Speaking of bank equity, and since good links should come in threes, here's an update on Basel capital requirements.

"People familiar with the matter"

2010-05-10T09:39:00.005-04:00

The Wall Street Journal this morning is quoting "people familiar with the matter" who say that Goldman Sachs is close to a deal to provide $2.2 billion in financing to a group led by Starwood Capital Group, so Starwood can buy the Extended Stay hotel chain.

May 17 -- a week from today -- is the deadline set by the bankruptcy court for acquisition plans from Starwood and/or from another bidder.

The alternative bidder is a group led by Centerbridge Partners LP.

The Wall Street Journal's story, by Lingling Wei, suggests that Goldman's willingness to get involved in this is a good sign that a recovery is underway.

"For months, investors have been gathering huge war chests to buy distressed real estate, but debt financing has been much harder to obtain. Goldman Sach's willingness to finance the Starwood bid is a sign that large well-capitalized banks are dipping their toes back into the business of financing offices, shopping malls, hotels and other commercial buildings."

Biglari says, "Don't look at us!"

2010-05-09T07:19:00.001-04:00

Biglari Holdings Inc., the corporate alter ego of Sardar Biglari, has announced that it has "absolutely no involvement in Denny's Corporation .... Without our approval, both parties' references to our company, including its subsidiaries, contain misinformation. However, we do not intend to correct any of these errors."

S. Biglari has been chairmnan of the board of Western Sizzlin' Corp. since March 2006, its CEO since May 2007. There is talk that he considers himself a restaurant business deal-maker extraordinaire, and that he could be tempted to make a move on Denny's.

What is simple fact is that Denny's is facing a proxy challenge, and that the challengers have argued: "The weaknesses of Denny's management have forced us to seek changes to the board in the interest of all shareholders. If the status quo is maintained, we are deeply concerned that the Company's future will mirror its past."

RiskMetrics agrees with some of the contentions of the dissidents, writing that in its analysis that Denny's has been a long-term underperformer "compared to IHOP in terms of the restaurant footprint, revenue growth and [same store sales ("SSS")] metrics. Denny's total unit count has declined since the current management took charge in 2001."

The incumbents reply: "Although they profess to want to work with the Board, none of the dissident nominees have ever spoken to the Company or made legitimate efforts to discuss their views or learn about the Company’s strategy and plan."

The dissidents want the company to reduce capiutal expenditues by $10 million. The company charges that in essence they've pulled that number arbitrarily out of their bunghole. (Okay, the filings with the SEC don't exactly put it that way. I'm paraphrasing.)

Bristol-Myers Squibb

2010-05-05T07:06:00.000-04:00

The board of directors of Bristol-Myers Squibb, (NYSE: BMY) the New York based drug maker, has authorized the repurchase of $3 billion of its common stock. The decisioin reflects a cash-healthy balance sheet.

Also, at Bristol-Myers' annual meeting yesterday, two dissident shareholder proposals were soundly defeated.

Also Tuesday, stockholders at Bristol-Myers' annual meeting overwhelmingly rejected a couple of shareholder proposals. A total of 90 percent voted against a proposal that would require the company to identify, in any future proxy statements, every executive whose compensation exceeds $500,000 a year. A total of 75 percent voted against a proposal that would require Bristol-Myers to increase its public reporting on its use of animals in research and product testing, as well as on its efforts and future goals toward eliminating use of research animals.

There wasn't much market movement on any of this news, presumably because the rest of the market was taking such a beating yesterday that even a slight rise (which BMY did manage) constitutes an accomplishment.

BMY, or its precursor firms, have an impressive history, dating back to 1858, when Edward Robinson Squibb (1819-1900) started his own pharmaceutical laboratory in Brooklyn, New York. During the US civil war, Squibb invented the pannier -- a compact wooden chest that battlefield medics could use for easily carrying around the medicines used to treat casulaties.

Separately, William Bristol and John Myers formed a company in Clinton, New York in 1887.

Those two companies merged in 1989.

In 2002, BMY was involved in an accounting scandal. They were apparently "channel stuffing" and had to restate their results three years back. They agreed to pay $150 million to settle the matter, while neither admitting nor denying guilt.

Onward!

Cascade Financial

2010-05-04T00:25:00.000-04:00

Cascade Financial Corp., the holding company for Cascade Bank, has resolved a dispute with a shareholders' group short of having to wage a proxy contest.

The group announced on Thursday, April 29, that it will expand the size of its board of directors. This is a fairly common way of adding some of the discontented group's representatives without having to boot any of the incumbents. But it raises the question: don't boards have an optimal size? There must logically be a trade-off involved between hearing the various points of view that ought to be represented in the board room on the one hand, and having unwieldy too-many-cooks meetings on the other? And if there is such an optimal number, this sort of resolution would tend to cause firms to overshoot it. Thus there would be a sacrifice for the immediate good of peace.

Anyway, Proxy Partisans extends its congratulations to the new directors of Cascade: Arnold Hofmann, Christian Sievers, and Thomas Rainville. Here's a bit of bio about each of them:

* Christian Sievers is an executive officer of H&H Properties, which grandly calls itself "the real estate company that gets results.

* Thomas Rainville is an elected Commissioner of the Mukilteo [Washington] Water and Wastewater District, which looks like a small town within broadcasting distance of Frasier Crane's radio station.

* Arnold Hofmann is the owner and developer of various multi-family and commercial properties in the Pacific Northwest.

MBIA lawsuit

2010-05-03T09:49:00.002-04:00

Early last month a state court judge in New York dismissed five of the six counts of a lawsuit MBIA filed against Merrill Lynch a year before.

MBIA was a bond insurer, and it lost big in the recent credit crisis as the insurer of CDOs issued by Merrill Lynch.

In the lawsuit, MBIA claimed that Merrill Lynch had fraudulently induced it to enter into these transactions as part of a scheme to “offload billions of dollars in deteriorating U.S. subprime mortgages and other collateral that [it] held on its books by packaging them ... or hedging their exposure through swaps with insurers.”

Merrill Lynch's reply, "So what? We're allowed to look for suckers, and you're allowed to be a sucker."

The court's response to MBIA, "You're a Big Boy." MBIA and its affiliate had contractually disclaimed reliance on any representations by Merrill Lynch as to the quality of those CDOs, so the court dismissed causes of action for fraud in the inducement, fraud by omission and negligent misrepresentation without regard to the truth of their accusations.

The contract claim that will go forward involves the theory that Merrill Lynch had promised to deliver securities of “AAA” credit rating quality, but had failed to do so when it delivered securities which had received but did not deserve such a rating.

Neighborhood Watch

2010-05-02T10:06:00.003-04:00

In January, Stephen Davis and Jon Lukomnik wrote a column for Compliance Week, summarizing the decade just completed from the point of view of "executives, boards, and investors."

In large part, the column is a criticism of Sarbanes-Oxley, the corporate reform bill created in response to Enron's melt down at the start of the new millennium. Davis and Lukomnik don't have a high opinion of SOX, and prefer instead what they think of as a "neighborhood watch" approach to compliance.

Read it for yourself here.

Equus Total Return

2010-04-28T09:06:00.000-04:00

Equus Total Return is a business development company (BDC) HQ-ed in Houston that trades as a closed-end fund on the New York Stock Exchange. I haven't said anything about BDCs in this blog yet, so perhaps this entry is a good way to start, because they are a peculiar corner of our financial system.

"In what way 'peculiar'? Am I a clown for you? Am I here for your amusement?"

Let me just focus for now on the news, Mr Pesci. Equus faces a proxy fight at the May 12 annual shareholders meeting. The stock price has been rather stagnant recently. It has been trading in a range roughly between $3 a share and $3.50 a share since June 2009.

The Committee to Enhance Equus, owning 11.4% of the outstanding shares of Equus Total Return, Inc., the dissident group, says that it shares its fellow shareholders' disappointment over this stagnation.

"The Committee also notes the current five-member majority of the Board, which includes Kenneth I. Denos, are attempting to further entrench themselves by packing the Board with four new nominees (who do not personally own any Equus shares) without properly investigating their backgrounds."

Equus has responded by noting that the committee has connections with one of Equus' own portfolio companies, Trulite Inc. , a hydrogen fuel cell firm. One of the nominees for director on the dissidents' slate is Jonathan H. Godshall, CEO of Trulite. Its chairman, John D. White, is another. Paula Douglass, a Director of Trulite, is yet a third. The charge, then, is that they want to take over Equus in order to run Equus for Trulite's benefit, not that of its own stockholders.

Barington Capital Group

2010-04-27T00:08:00.005-04:00

Last month the Barington Capital Group sent a letter to the bigwigs of Ameron Int'l Corp. advising Ameron to rationalize and refocus its portfolio.

Ameron (NYSE: AMN), a company based in Pasadena, Calif., producers of water transmission lines and fabricated steel products, such as wind towers; fiberglass-composite pipe for transporting oil, chemicals and corrosive fluids and specialized materials; and products used in infrastructure projects.

As for Barington, we've encountered them once before.

The letter was addressed James S. Marlen, the Chairman and CEO of Ameron. It said that Ameron has unused potential that is being ignored due to its leading market positions, attractive end markets, valuable joint ventures and a healthy, asset-rich balance sheet.

On March 31, Marlen replied, in what sounds like passive-aggressive fashion. "While we wholeheartedly agree with you that Ameron's stock is undervalued given its long list of positive attributes, which include leading market positions, attractive end markets, valuable affiliations and a healthy, asset-rich balance sheet, we disagree with many of your theories as to why Ameron is undervalued. We look forward to discussing these positive attributes with Barington and all of our valued shareholders in the future."

Presumably, then, they do not think that their portfolio of products is inadequately focused.

Principal Place of Business

2010-04-26T09:05:00.003-04:00

Recently, in Hertz Corp. v. Friend, the US Supreme Court has unanimously endorsed the so-called "nerve center" test for determining what is a corporation's "principal place of business."

This is an important question in terms of access to the federal courts on a "diversity" rationale. A natural person is deemed to have only one state of residence for purposes of diversity jurisdiction. A corporation is deemed to be a resident of any state in which it is chartered and of the state that is its principal place of business. What does this mean? There has been what the law firm Blank & Rome has called a "cacophony of approaches," circuit by circuit, and SCOTUS now wants to turn this into more of a melody.

In the instant dispute, Friend et al. sued Hertz in a California state court seeking damages for what they claimed were California's wages and hopurs laws. Hertz, presumably believing it would receive better treatment in federal court, sought to remove the issue to same on ground of diversity of citizenship. The federal district court in California refused to take the case. It said Hertz was a citizen of California, so there was no diversity.

SCOTUS has now reversed that, finding that Hertz' nerve center is in New Jersey, so it may get into federal court.

The meaning of the phrase "principal place of business" is also a contested one in the context of bankruptcy, as SCOTUS observed.

Here's a quite recent illustration of that fact.

WellCare Health

2010-04-25T12:03:00.004-04:00

The story about WellCare Health seems to have been rather buried in the weekend edition of The Wall Street Journal. But it's there if you look. Furthermore, if you do find it on page B6 you might skip right by it because the headline is misleadingly anodyne.

The headline is "Director Resigns at Wellcare Health," -- which sounds as if the story is a mere personnel matter, not a significant accusation. The subhead doesn't help much. It says "Head of Audit Committee Raises Questions About Company's Accounting." She did more than raise questions. She made statements. And they weren't about "accounting." This isn't an issue concerning, say, mark-to-market versus mark-to-model. This has to to with overcharges, and potentially it seems with fraud.

Here's a link to the resignation letter, dated April 21.

Regina Herzlinger, the head of the audit committee of the board of directors at WellCare, has resigned from the board and has made significant accusations on her way out the door. She says internal audits have found that WellCare overbilled Medicaid program of the state of Illinois by $1 million in 2009 and potentially overcharged states by almost half a million dollars more in connection with maternity care.

Nor does she regard this sort of thinbg as the result of honest mistakes. She also writes, after all, of "facially credible evidence of an unlawful agreement among at least Chairman Chuck Berg, Director Chris Michalik, and Lead Director Hickey to seize control of the Board regardless of the best interests of shareholders."

WellCare has a history. Back in the fall of 2007, 200 state and federal agents raided company headquarters in a dispute that led to the restatement of three years of earnings, and the firing of three of the entity's top executives. Last year, Georgia's Dept. of Community Health fined WellCare $610,000 in connection with the company's failure to account for each patient visit in which it paid providers.

CFS Bancorp Meeting, April 27

2010-04-21T08:41:00.000-04:00

CFS Bancorp, the Indiana-based holding company that operates Citizens Financial, holds its annual shareholder meeting in less than a week.

A proxy contest is underway, because PL Capital Group, which owns 9.9% of the common stock, wants to put John Palmer on the board.

The company has received some assistance of late, because Glass Lewis has recommended a vote in favor of the election of the board's nominees. Glass Lewis says "we are not convinced that the Dissident should be elected to the CFS Board."

Glass, Lewis & Co. serves institutional investors that collectively manage more than $17 trillion in assets, and conducts research focused on the long-term financial impact of investment and proxy decisions. In its report, Glass, Lewis, speaking to one of the contested issues behind the proxy fight, said that it considers the retention bonuses paid by issuer to be appropriate, "given the company's reasonable pay-for-performance and the cancellation of cash bonuses despite [named executive officers] meeting portions of their individual performance objectives."

One of the issues here involves the charge of nepotism. The chairman of CFS is Thomas Prisby. The company employs two of his children -- Michael and Sandra Prisby. But Glass Lewis writes soothingly, "we do not feel that the Dissident's intent to eliminate all related party transactions, including the employment of Michael and Sandy Prisby are in the best interests of shareholders in this case."

Another proxy advisory group has taken the opposite side. Proxy Governance has written, “Given the other significant issues the dissidents have raised about the board’s attention to important governance details – the structure of certain bonus programs even as shareholder value plummeted, and the board’s acceptance of unnecessary related party transactions with the CEO’s direct family members – we believe shareholders will be best served by electing the dissident nominee, J. Palmer.”

Canadian mining

2010-04-20T09:26:00.006-04:00

Here's a link to a very well-written article about the Canadian mining industry, a story that ran April 6 in the Financial Post Magazine.

Reporter Karen Mazurkewich adopts an almost elegaic tone as she ticks off the names of the great mining companies who have played a big part in that country's history:
Barrick Gold Corp., Falconbridge Ltd., Noranda Inc., Inco Ltd., Teck Resources Ltd.
These companies have either been swallowed up by foreign concerns, or they are now doing their mining outside Canada.

Is this because Canada's mineral wealth has been exhausted? Not at all. As Mazurkewich notes, the industry momentum has stalled due to "rising energy and labour costs, First Nations' protests, a provincial stealth tax on diamonds in Ontario and moratoriums on exploration."

She quoted Warren Irwin, a name that leaders of this blog may remember. Irwin, president and president and chief investment officer of Toronto's Rosseau Asset Management, which is invested in Noront Resources, says that battles with First Nation groups have made the climate too uncertain.

"Ontario thinks of itself as a stable world-class mining jurisdiction, but the reality outside is that it can get pretty lawless for exploration companies, and the government has been turning a blind eye to it," says Irwin. "As a direct result of the uncertainty in investing in mining in Ontario we have been forced to go to other jurisdictions for investments."

This blog can offer him nothing but a sympathetic ear, but it does offer that.

Lennar Corp.

2010-04-19T01:30:00.004-04:00

Lennar Corp. is attracting the wrong sort of attention these days. I might as well put this blog officially on that bandwagon.

Lennar, which is based in Florida, is the third-biggest homebuilder in the United States.

Back in 2006, when home building still seemed like a bullet-proof business to be in, Lennar and LNR Property Corp. co-owned a large property north of Los Angeles, Calif., known as Newhall Ranch. They agreed, at the urging of go-between Victor MacFarlane, to sell a majority stake in that property to the California public retirement system, CalPERS, for $970 million. The land sat along the I-5 corridor, a developers' dream. What could go wrong?

A good deal did go wrong with this joint venture, known as LandSource. CalPERS lost $1.2 billion, and this rather dented that pension system's previously high reputation for making prudent investment calls.

That was the least of things. It appears that this year federal criminal investigators have become interested in the LandSource imbroglio.

The Fraud Discovery Institute has listed the LandSource matter as one of several red flags indicating, in FDI's words, that something RICO-actionable is underway in Lennar. It portrays LandSource (I'm paraphrasing here) as a classic pump-and-dump situation, in which Lennar took the money while the gettin' was good.

It obviously isn't illegal, or wrong, to buy low and sell high. But the FDI regards the LandSource deal as part of a broader pattern of behavior -- one of many red flags, which also allegedly included such matters as a falsified HUD document, civil complaints by homeowners, F grades from the Better Business Bureau, etc. They put together an intriguing case.

Here's what Tracy Coenen has had to say.

I've focused on the CalPERS loss here because ... well, because that is eye-catching, given CalPERS' image and broader significance for widows and orphans. But I'll be trying to catch up on this story in its other aspects as it develops.

Dennys Meeting in May

2010-04-18T01:00:00.000-04:00

The restaurant chain Dennys will hold its annual shareholders meeting in May.

Incumbent directors are involved in a proxy campaign against the nominees of a dissident group led by Oak Street Capital Management and Dash Acquisitons, who together account for about 6.3% of Dennys' common shares.

One of the claims of these shareholders is that Dennys has not been responsive to the needs of its franchisees, as exhibited for example in a letter sent to the Dennys board last year by the franchisees' organization, the DFA, a group that represents 85% of the company's franchised restaurants.

That letter, dated November 9, referred to the "emotional toll from the anxiety, frustration and despair of the franchisees," and included a graph indicating "that not only have system-wide same store sales been negative for the last eight quarters but the gap between our Brand and its primary competitor (IHOP) is widening ... the sales trends are indicative of the fundamental process failures...."

The company has now produced on its own behalf a newer letter from the DFA, asserting regret that there "may be some confusion about communications from the DFA Board during 2009 expressing certain concerns to the Denny’s Board on behalf of its members."

Actually, according to the latest letter, everything is lovey-dovey now: "As a result of those communications, a healthy and constructive process began which included a meeting between you and me. The focus of this process and our meeting involved a comprehensive discussion of the state of the Denny’s Brand, strategic initiatives and franchisee perspectives."

Don't you love a good group hug?

To How Many Failures is Trump Entitled?

2010-04-14T00:05:00.000-04:00

I just wish I understood Donald Trump's career path.

I guess that failing on a really big scale gets one a reality TV show, and success in that peculiar endeavor gets one another chance to fail on a really big scale again, as indicated in the article to which I've just linked you.

Am I missing anything?