August 20, 2005
Another Example of Bad Corporate Governance: The Wall Street Journal
I, along with most other members of the business community in the United States, find time to read the Wall Street Journal every day -- the nation's number one newspaper. It is as accurate as a newspaper can be about developments in the financial community. But I have noticed some curious weaknesses. The Wall Street Journal is usually late to a corporate management scandal story (reporting only after others have made the claims) and its editorial page is strangely tolerant of management misfeasance (until fraud -- malfeasance-- is the only possible verdict and then it jumps on in severe condemnation, joining others). Now we learn, from the New York Times, whose business section does far better investigative reporting than does the Journal, that the corporate governance practices of the Wall Street Journal are -- under all modern accounts -- very, very poor. I understand that the editorial page is independent of the business affairs of the paper but --It would seem hard for the editorial staff to hammer the management structure of Google (for supervoting stock that gives founders absolute control) when the Journal itself has such a system. It would have to press for proper corporate governance when the Journal itself does not have it.
Ownership of the Journal is divorced from managment power (using supervoting shares and trusts), managers are self-perpetuating and stifle any dissent (dissenters are shunned as disloyal), and managers run the paper for personal goals rather than company profits (pride in the press stuff). This is as bad as management gets short of fraud and the financial results show it -- lackluster profits, a refusal to innovate, a refuse to entertain offers, and a refusal to capitalize on a valuable trade-mark. I am reminded of a famous 10th Circuit case in 1972 in which the Court allowed the owners of the Denver Post to refuse a very generous offer by New York buyers, in order to protect a locally owned editorial page, on the grounds that the paper, a poorly run, politically biased, parochial rag at the time, was "quasi-public."
August 19, 2005
Merck Found Liable, Jury Award $253.4M
The Associated Press has just reported that a Texas jury has found Merck & Co (NYSE: MRK) liable for the death of Rober Ernst. Jurors awarded Ernst's widow $253.4 million in damages. The $253.4M damage package includes lost pay as a Wal-Mart produce manager, mental anguish, loss of companionship and punitives. The package includes a $24 million penalty to the widow for mental anguish and loss of companionship and $229 million in punatives. Plaintiff's lawyer Mark Lanier expects that the punitive damage award will be reduced based on Texas punitive damage laws.
The 12 person jury deliberated for 10 1/2 hours before deciding that Merck was to blame for Ernst's death.
This is the first of what will be many trials against the New Jersey based Merck. For those interested in its effect on the stock price, MRK is currently down 3.16% or 96 cents to 29.45. Short the stock. We are about to witness another slow painful corporate death by a swarm of plaintiffs' attorneys.
August 18, 2005
Redskins Owner Ups His Bet on Six Flags
Six Flags Inc. (NYSE: PKS) rose Thursday after Red Zone LLC, its largest shareholder, made a tender offer to buy up to 34.9% of the outstanding stock, up from its current 11.7% stake. Red Zone LLC is owned by Dan Snyder, the current owner of the Washington Redskins NFL team. Red Zone LLC has offered to pay $6.50 a share.
In order to get the tender offer through, Snyder's Red Zone LLC needs to capture three board seats on Six Flags. Snyder apparently intends to fill one seat with himself and the other with Red Zone Chief Executive and former Walt Disney Exec. Mark Shapiro. Snyder's goal is to oust Six Flags Chief Kieran Burke and CFO James Dannhauser, and rebrand the company and sell off some of its real estate.
Currently the stock is trading at $6.49. Investors appear to believe that Snyder will be able complete his offer.
Jury Begins Deliberations on First Vioxx Case
Today, Jurors began dilberations into the nation's first Vioxx-related civil trial. In what could be a multi-billion dollar albatross around the neck of Merck & Co (NYSE: MRK), Merck attorneys stressed that the century-old company would never knowingly make deadly drugs. However, Mark Lanier, the attorney for a widow of a Texas man who died in 2001, argued that Merck was practicing denial and deception to make billions of dollars in annual profits. Lanier focused on the ethical considerations and stated that Merck should have told consumers "the good, the bad and the ugly" with regards to the known side effects of Vioxx.
This case is the first of 4,200 lawsuits and analysts have speculated that Merck's liability could reach $18 billion. Lanier suggested to jurors that his client deserves $229 million or more. This could be the beginning of the end for Merck if the jury finds for the plaintiff.
Google At One
My students have emailed with some glee to remind me that I did not like Google's IPO one year ago -- at $85. The stock price ran up over 300% at its peak. I complained about Google's governance structure, it concentrated voting power in the founders, and about the need for the IPO itself. Google admitted at the time of the IPO that it did not need the cash and was only selling a small fraction of its equity. The public is, in essence, chasing a very small float of stock in a locked in minority position.
The reason for the IPO then? To enable insiders to sell stock in secondary offerings and get mounds and mounds of cash -- for Ferraris. Insiders later sold $1.7 billion in stock. So what does Google do on the one year anniversary of its IPO? A $4billion, 14.2 million share secondary offering. Story Google admits it does not have any plans for the new cash, that its rate of growth in revenue is going down, and that its expenses are going up. What??? The public will snap up the stock and Kramer will hype it (target $350 or something like that) on Mad Money. Show some earnings in a tech stock and we go nuts.
New Book on Sarbanes-Oxley
David Scheonbrod has used Sarbanes-Oxley (SOX) to make his more general point that government regulation by open-ended grants of authority to federal agencies is costly and wrong-headed. Schoenbrod, Saving Our Environment from Washington (Yale, 2005). He notes that Congress, in SOX, delegated to the SEC and PCABO the power to impose accounting for "internal controls" on firms without specifying what the term meant. The result is regulatory chaos, as as been noted in this blog. Post
August 17, 2005
Potential Grasso Settlement??
Newsweek reported today that former NYSE Ex-CEO Dick Grasso has been offered a settlement deal of $25 million to resolve the legal dispute over his $140 million pay package. If this offer is accepted by Grasso, John Thain, the current NYSE CEO, will have made a huge concession on the part of the NYSE, which originally wanted a large part of Grasso's compensation package returned. Last year, NY Attorney General Eliot Spitzer filed a case against Grasso seeking at least $100 million in damages for potential violations of New York State not-for-profit law, which requires compensation of executives of not-for-profits to be "reasonable."
Grasso has also sued the NYSE to recover an additional $50 million that he claims to be owed under the terms of the contract, which if he wins the NYSE will need to pay triple-damages. Grasso has stated that he wants the NYSE to donate the amount of money that he is owed or will be owed to charities which support sons and daughters of police, firemen, and construction workers.
The Delaware Chancery Court has recently affirmed Michael Ovitz's $140 million pay package but only after putting the board of Diseney through a very embarrassing trial (which I discussed here). With the current New York Governor's run by Eliot Spitzer and the efforts by the NYSE to go public by consolidating with ArcaEx (requiring SEC approval), there are heavy incentives on the NYSE and Spitzer to settle in an effort to avoid the embarrassment of displaying the NYSE's shoddy executive pay approval practices. There will be board members saying that they did not understand the pay package and others saying that they had the information and did not apparently understand it or are now just misrepresenting their approvals. It would be very messy.
The Wall Street Journal editorial page has long argued that Grasso's pay was just a "private matter" between the NYSE and Grasso. If the exchange wanted to pay him that much it could. The argument, of course, overlooks two points. First, whether the NYSE board approved the pay (the subject of the litigation) and, second, if so how is it that the NYSE can pay this much. The latter questions is a reflection on the NYSE's strangle-hold on traded listed stocks. The excessive pay package is passed on to traders through member fees and the members and their clients have no choice but to pay it. In other words, the size of Grasso's pay package is evidence of the supra-competitive position of the NYSE in the country's trading markets, a position the the SEC has allowed and indeed fostered.
Selling Short in Your 401(k)
The Wall Street Journal today has an article on mutual funds that are attempting to mimic hedge funds investments strategies, which include selling short. At issue is whether such mutual funds should be marketed as an investment options for 401(k) retirement plans. Many, no doubt, will be horrified at the prospect of retirement funds selling short, hence the title of the article. I am not. I have long believed that the limits on short selling favor privileged investors (who could do it) and create a class of investors who must be long in shares to make money -- to the benefit of Main Street and Wall Street both. There is a bias in the market for making money on the long side that comes at the expense of small, individual investors. It is not the investment strategy of selling short that is inherently bad it is how is it used. Good retirement funds could prudently use the strategy of selling short to make money for beneficiaries.
August 16, 2005
11th Circuit Upholds Tyson Lawsuit Decision: A Case Study on Problems with Juries in Business Cases
The Eleventh Circuit today unanimously affirmed a June 2004 ruling by U.S. Senior District Judge Lyle Strom, who threw out the jury's finding that Tyson Fresh Meats Inc. used contracts with select beef producers to manipulate cattle prices. A copy of the opinion in PDF format can be found here.
The 11th Circuit agreed with Judge Strom, who said that the cattlemen failed to show sufficient evidence against Tyson. As such, the 11th Circuit rejected the cattlemen's appeal to reinstate the jury verdict of $1.28 billion against Tyson. The 11th Circuit said that the cattlement "did not present any evidence which a reasonable jury could conclude that Tyson lacked pro-competitive justification for using agreements" with the selected beef producers.
The case illustrates what all litigators know, it can be very difficult to education a lay jury on the proper context for understanding facts and evidence in sophisticated business dealing cases. When the education fails, the case can get completely off the rails.
JPMorgan and Toronto Dominion Settle Enron "Megaclaims" Lawsuit: Is it Enough?
The Associated Press reported today that JPMorgan Chase & Co. (NYSE: JPM) and Toronto Dominion Bank (NYSE: TD) agreed to pay at least $420 million to settle their parts of the "Megaclaims" lawsuit filed by Enron against 10 banks, alleging they "aided and abetted fraud" and could have prevented the energy trader's demise. JPM agreed to pay $350 million in cash to Enron Corp and TD agreed to pay $70 million, also both banks agreed to forgo certain claims in Enron's bankruptcy proceedings and agreed to pay more money to Enron for the ability to pursue others.
JPM said that it does not expect its settlement, which is subject to approval by the bankruptcy court, to have a "material adverse impact" on earnings, but JPM has now agreed to pay nearly $2.6 billion so far to settle claims involved with its involvement with Enron.
In total, Enron said the settlements announced today bring payments in the Megaclaims case to $735 million and banks have agreed to forgo or pay to pursue claims valued at around $3 billion.
These raw numbers and the tepid statements of the JPM public relations department are not very satisfying. One yearns for a judge, in approving the settlement, to ask JP Morgan: "Has the bank taken steps to make sure this will not happen again?"
Financial institutions which still have Megaclaims exposure include: Barclays PLC, Citigroup Inc., Credit Suisse First Boston Inc., Deutshe Bank AG, and Merrill Lynch & Co.
Goodyear Gets Wells Notice
The Goodyear Tire & Rubber Company, the nation's largest tire maker, announced today that it received a "Wells Notice" from the Securities and Exchange Commission. (The press release can be found here) The Wells Notice was given in connection with the SEC's investigation into accounting matters included in the company's restatement of financials, announced on October 22, 2003.
The Wells Notice states that the SEC staff intends to recommend that a civil or administrative enforcment action be brought against Goodyear for violations of the Securities and Exchange Act of 1934 Act. These alleged violations include problems relating to the maintenance of books, records and internal account controls, the establishment of disclosure controls and procedures, and the periodic SEC filing requirements, as set forth in sections 13(a) and 13(b)(2)(A) and (B) of the Act and SEC Rules 12b-20, 13a-13, and 13a-15(a).
Under SEC procedures, a recipient of a Wells Notice has the opportunity to respond to the SEC staff before the staff makes a formal recommendation on any action which should be brought by the SEC. The SEC also issued Wells Notices to a former CFO and Chief Accounting Officer of the company.
Is Anybody Watching? The Restructuring of Our Securities Trading Markets
The news today on the radical changes in our securities trading markets is stunning. Is anybody outside the trading industry paying attention? The health of the country's financial markets is at stake. Since the SEC's adoption of new Regulation NMS, to be effective early next year, the trading markets have begun a radical restructuring. The historically dominate markets, the NYSE and the Nasdaq, have announced mergers, attempting to consolidate their way to market share in the new environment. Worried Wall Street investment banks and brokerages have begun buying positions in small regional markets, the Philadelphia Stock Exchange, and pooling resources to develop new exchanges, an exchange in Boston is rumored. Story. Why worry? Are purifying market forces at work? No and yes. No: The new environment is completely structured by a combination of the new SEC Regulation and over 30 years of other market regulations. The players are merely attempting to adapt to an artificially created trading market habitat. Yes: But some market forces are not good ones. First, we have long recognized that some combinations are driven by a desire to monopolize not by a desire to compete and the government, since 1890, has attempted to control such impulses -- with antitrust laws. The antitrust authorities should be watching these combinations for evidence of combinations designed to monopolize trade. Second, investments by investment banks in publicly traded equity of trading markets will create severe conflicts of interest problems in the management of the trading markets. No-one seems to be anticipating the form or scope of these conflicts and whether they need to be regulated. Third, there is news that an Australian corporation (in cooperation with an exchange from continential Europe) wants to buy the London Stock Exchange. A Swedish company may be the competiting bidder. A German exchange has already bid for the London Exchange and been rejected. What is our policy for having our exchanges owned or controlled by consolidated foreign investors? The business community was surprised by the political backlash against CNOOC's bid for Unocal, will Wall Street be similarly surprised by a negative public reaction to the sale of an American trading exchange to a foreign corporation, which also could be state owned and operated? I would suggest that some national planning take place on the new structure of our trading markets. Congress may need to direct the SEC to start the discussion. The debates over Regulation were not an example of such planning as they focused on details in the SEC regulations with speculations over the effects of rule changes. Nothing may come of hearings of a grander scale but we may be able to predict rather than simply react to changes in market structure. Our reaction time may otherwise be too late.
Mad Money Makes Some Mad
This morning Dick's Sporting Goods announced that it would not meet earnings forecasts and its stock fell significantly thereafter. Last night Jim Kramer, on his show Mad Money, recommended that his viewers buy the stock. The show does, at the end of the week, display its winners and losers but it would be interesting to balance the tally. Does $100 on each Kramer recommendation lead to more or less money by the end of the week? The show is high energy and positive, the callers are enthusiastic and supportive. The broker/dealers must love the show -- Kramer sends them clients. But what is the tally of a week's or month's recommendations? Where is the show that details, week after week, how small investors should not speculate in individual stock and how most lose if they do. Where is the colorful host that pillories the stock pickers and paints an honest picture of the winners and losers in our stock markets?
Responses to Little Investor as Sucker Post
The following is the a notable example of the e-mails I recieved on my "Investor as Sucker" post.
I heartily agree with the points made in the posting, "The
Little Investor As Sucker." I make these points in my outline
entitled, "ERISA and Federal Income Tax Aspects of Participant
Directed Investments in Defined Contribution Plans." The outline
was published by Practising Law Institute as part of the course
handbook for the seminar, "Tax Strategies for Corporate Acquisitions,
Dispositions, Spin-Offs, Joint Ventures, Financings, Reorganizations
& Restructurings 2004."
A copy of the outline is attached, and an updated version will be
published by PLI in October 2005.
Steven H. Sholk, Esq.
Gibbons, Del Deo, Dolan, Griffinger & Vecchione, P.C.
One Riverfront Plaza
Newark, New Jersey 07102-5496
(973) 596-4639 (Phone)
(973) 639-6338 (Fax)