Business Law Prof Blog

Cramer's Darling RHEO Tanks...

Posted by Jason R. Job

I first must admit that I am somewhat of an addict of Jim Cramer's tv show "Mad Money."  I have been known to run home in order to catch an episode instead of doing other things.  However, I feel that I get more out of the show by watching Cramer's performance and listening to some of his investing tips rather than listening and trading on his stock picks.

Today, OccuLogix (NASDAQ: RHEO) reported that its late phase trials of its Rheo procedure failed to reach its goals.  As a result, OccuLogix is trading down $8.50 or approximately 66%.  I remember paying special attention to Cramer's discussion on this stock in early January (1/12/06 to be exact), because I am a shareholder of OSIP which makes a drug for wet age-related macular degeneration, while the Rheo procedure was supposed to treat dry age-related macular degeneration.  In his discussion, Cramer touted the market share which could be obtained if this Rheo procedure actually worked.  However, when OccuLogix reported that the Rheo procedure was unsuccessful, it topped the list of Cramer's worst picks.

Now, I know that Cramer has been trying to be more open about not purchasing stocks on a so-called "Cramer Pop" and to use limit orders.  Additionally, Cramer constantly reminds viewers that you must do your homework before investing in a stock.  Nevertheless, when Cramer's picks have days like today, I am just waiting to see the first lawsuit brought by a viewer who lost large sums of money based upon Cramer's stock picks.  I know that there are disclaimers before the show begins; however, I am always distracted by Jim's head spinning with a countdown on his forehead, so I have not had the opportunity to read all of them.  But, I am sure that at some point someone will attempt to sue Cramer; it is just a matter of time.

Update: Tonight on Mad Money, Cramer did mention that he screwed up his choice of RHEO.  Being typical Cramer, both his bobble head and he had post-it notes on their forehead with RHEO in big black letters.  Cramer also apologized and mentioned that he was not always correct.  Unfortunately, other than his choice of Dick's Sporting Goods back in August of last year. (see related post Mad Money Makes Some Mad).

Exxon Can't Win

Exxon's last year, the most successful in American history, has earned the company heaps of negative attention and may be rewarded with tax penalty.   Now  Floyd Norris, of the NYT, and others are after the company because it is not investing enough in new development.  The company is returning dividends to shareholders rather than investing in new sources of energy.  Norris labels the development a "partial liquidation."  Jim Kramer refers to the company with derision as a "bank."   

This all sounds like management prudence to me.  Exxon has limited development opportunities and will not pursue high risk ones just to be in the exploration business.   Norris seems to want Exxon to risk its money for the public good, taking high risk gambles to enlarge energy supplies, rather than marshaling its funds (increasing its value) for its private shareholders. 

Remember when we criticized oil companies for drilling too many "dry holes" rather than returning money to shareholders?  We said then that it was management "hubris" that caused them to keep and waste money rather than return it to shareholders.  Norris's arguments support Exxon management, not the reverse.

Japan Has its Own Worldcom Scandal

Livedoor is Japan's Worldcom.  Takafumi Horie assemled a company with a professed market value of $7 billion through more than 30 acquisitions.  He apparently then overstated the revenue of his new subsidiaries to keep Livedoor's stock price high.  Horie has been arrested but not charged. 

Kramer Tells Students to Flip Student Loans

Jim Kramer has returned to his alma mater, the Harvard Law School, to hold his hit show, Mad Money. The show was great, featuring his unusual candor when asked nontraditional questions by some very bright students (with the exception of the face-painted Harvard football player who asked about Cramer's sex life in college -- I guess football players are the same everywhere).  However, he began the show by telling students that he "flipped" his student loans while in school.  In other words, he took the proceeds from his subsidized loans and invested them in stocks rather than paying his tuition.  His stock profits paid his tuition. His is terrible advice of course.  First the ethics of taking government subsidized student loans and investing them in stock are suspect at best. Second, the risk of losing the money in the stock market is substantial.  The returns from stock speculation can never beat the beat the risk/return profile of investing in a law degree; a close to sure beat on collecting, in present value terms, a degree worth close to $600,000.  I trust students understand that his example should not be followed in this regard. 

Government Owns Twenty Percent of United

UAL, the parent company of United Airlines, has emerged from bankruptcy after three years of reorganization with an unusual largest shareholder, the United States government. News The government, through the Pension Benefit Guarantee Corportion, is UAL's largest shareholder, holding a whopping twenty percent of the stock of the publicly traded company.  The Pension Benefit Board took over United's underfunded pension plan ($10billion) and became an unsecured creditor.  The unsecured creditor took stock in exchange for their debt in the reorganization.  The government as the largest shareholder, could vote on the new directors and, with a 20% stake, effectively control the company.  This will not happen.  The government will sell its stake as quickly as possible and will not play a role in company management.  Apparently if company affairs require  a shareholder vote before the government has dumped all its shares, the government will abstain.  The development does stimulate the imagination, however, and give rise to some speculation on scenarios when the government would have an obligation to exercise its vote.   

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Dale Oesterle & Jason R. Job

Cramer's Darling GOOG Misses

Posted by Jason R. Job

One of Prof. Oesterle's "favorite" stocks when I was a student at Ohio State was Google.  Every day in class, he would come in and discuss why he believed that Google was overvalued.  (Check out some of his discussions of GOOG: Oct. 21, 2005; Aug. 18, 2005 (Google at One); July 22, 2005).

Today, after the closing bell, Google (NASDAQ: GOOG) reported net earnings per share of $1.22 per diluted share while street estimates were $1.51 a share.  After GOOG reported earnings, its shares were halted.  Then, once the shares reopened for trading, GOOG was trading down $70 to $361 per share or 17%.

Additionally, it will be interesting what Jim Cramer has to say tonight on Mad Money when his "fan favorite" is trading down nearly 150 points from his prediction!! (Cramer expected shares of GOOG to hit $500).  BOOYAH!

Shareholder Access to Proxy Materials

I have joined a letter to the SEC written by Lucian Bebchuk, Harvard Law School, and others asking that SEC tell AIG it cannot exclude a shareholder Rule 14a-8 proposal on corporate governance.  A shareholder of AIG is attempting to amend the company's bylaws to allow shareholders to place candidates on the company's proxy in specified circumstances.  There is much at stake here.  Shareholders have the power to amend a company's bylaws to change the method of electing corporate directors.  The Committee on Corporate Laws of the ABA has recently affirmed the right.  Yet shareholders cannot force the matter to a vote unless one of them pays a million or so dollars to put a package of proxy solicitation materials together and mail them to all the other shareholders.  The only way the right has any meaning is for shareholders to have access to the company's routinely mailed proxy solicitation materials.  SEC Rule 14a-8 provides a method to do just that.  The SEC must, however, interpret the Rule to allow shareholders to put election proposals in the company's materials.  The SEC has conflicting precedents on the issue.  Time to straighten the matter out -- for the better.

Exxon Record Profits

Exxon's publication of its record profits for 2005 will no doubt renew the debate over a windfall profits tax on energy companies as a penalty for gouging.  Post

Disney-Pixar Merger Conditions

The proposed merger between Wall Disney Company and Pixar Animation Studios has an unusual condition.  Pixar's award-winning creative team of seven executives, specifically named, must stay will the company or Disney can walk.  The retention of Pixar's President or Vice President, a more common provision, is also a condition of closing.

Icahn Leads the Way Again

Finally, a hedge fund that is focusing on egregious executive expenses and perks and a primary indicator of a firm's poor management.  Ichan, in his battle to take over Time Warner, has focused on the medial giant's fleet of corporate jets used by senior managers for both business and personal travel.

Guidant Acquisition Not a Done Deal

Boston Scientific offer of $80 a share for Guidant may not be the final chapter in the bidding war between Boston Scientific and Johnson and Johnson.  First, Boston Scientific's very generous offer has put additional downward pressure of its already falling stock price.  Hedge funds and other speculators could purchase Boston Scientific stock, block the the deal from closing, and hope to profit on an immediate stock price increase.  Second, Boston Scientific has its own problems with regulatory authorities on its products and this additional negative pressure on its stock price is causing the stock exchange portion of the price to hit the lower price collar, limiting the number of shares Boston Scientific has to tender to close the deal.  The offer will fall in value to below $80 once the collar is triggered.  At that time, Guidant has the option of not closing on the deal.

The Enron Trial

The criminal trial of Enron's ex-CEOs, Kenneth L. Lay and Jeffrey K. Skilling, starts tomorrow and the country watches.  A great deal of ink has been spilled already on this trial and there will more, much more.  At risk is our placing too much social significance on the result.  This will be a four month trial on a specific set of facts to a specific jury.  An acquittal will not be proof that America coddles rich swindlers and convictions will not be proof that America punishes rich swindlers.  The results will depend on how the facts play out at trial.  The best lessons will be procedural:  why does it cost millions to bring CEOs to trial?  How should prosecutors present complex cases of financial fraud to a jury?  What is the role of and appropriate procedure for parallel prosecutions (criminal and civil)?  Whatever the result, I fear history will over-value the outcome.