MacFadyen: Regulators, Mount Up
October 19, 2009
I've been critical in the past of the SEC's efforts to punish insider trading. It's not that regulators aren't doing what they can to uproot the transgressions, it's that they're far too quick to send the defendants on their way after a quick settlement and a promise not to do it again. The most recent arrest, however, seems to signal that the SEC isn't playing games anymore, as the bail was set at a record $100 million for Raj Rajaratnam, the founder of hedge fund Galleon Management. He was charged with orchestrating an insider trading ring that generated roughly $25 million in illegal proceeds.
The allegations seem to fit the same profile as other cases, but they also demonstrate how deep the corruption can go, as a Moody's rating analyst, a McKinsey & Co. consultant, corporate development executives at IBM and Intel, and others were all said to be involved. It's unfortunate, but I'd venture that nine times out of 10, the sister in law of the corporate counsel of any deal probably knows about these transactions well before I even get a sniff of it. The Moody's analyst, for instance, was fingered as tipping off the Blackstone Group's Hilton acquisition; IBM's Robert Moffat was identified as divulging nonpublic information on Sun, picked up in the course of due diligence for IBM's acquisition; and McKinsey's Anil Kumar was allegedly the source who tipped off AMD's divestiture efforts to Abu Dhabi.
I'm guessing that the $10,000 earned here and there through the tipoffs amount to pocket change for most of these guys, and the $25 million Galleon booked as profits barely dent the firm's billions of dollars of assets under management. If it's not obvious to regulators, it seems pretty clear to me that the issue isn't the promise of riches, but rather that nobody is afraid of getting caught.
Martha Stewart's jail term probably scared a few celebrities, but it did nothing to give pause to the real insiders. Names like Paul Berliner, Matthew Zachowski or Michael Stummer may not have the same cachet, but all of them were charged and allowed to walk after paying a small fine without admitting or denying any culpability. The SEC books a settlement, padding its stats, while the accused are free to go with only their ego suffering any real penalty. It perpetuates the belief that insider trading is a victimless crime.
It should be noted that Rajaratnam had no problem coming up with the bail money. Clusterstock perhaps said it best, but this is exactly why I won't waste my time -- or more importantly money -- trying to pick stocks. I'd also argue that this is why insider trading shouldn't qualify as a victimless crime.
My colleague, Kelly Holman wrote a great article in IDD a few weeks back that basically asks the question: what the heck happened to the infrastructure boom? For two or three years, infrastructure was all anyone wanted to talk about. Last year, alone, there were 37 fund closings targeting the space, corralling $34.3 billion. The money is there, but where are the deals?
Like everything, though, the debt markets have rained on the parade.
Despite the success certain investors have had, even large investment bank-managed funds have found it tough sledding when it comes to securing debt to close deals in 2009. A Citi Infrastructure Partners consortium was unable to obtain financing to close its $2.5 billion deal for the 99-year lease of Chicago Midway Airport, causing the high profile transaction to collapse in April.
"It's not impossible in the infrastructure world to obtain financing, but it's difficult enough to give developers pause," says George Miller, a partner at Mayer Brown LLP who focuses on infrastructure.
Apparently, IDD has some loyal readers in the deal community, as the infrastructure space has seen interest percolate in the past few weeks. Navigation Capital Partners, The Sterling Group, Golden Gate Capital, and Bunker Hill Capital have all made plays in the infrastructure space. It's just a handful of groups, but it seems like a good sign for the broader market
Here's another question: what ever happened to the Icahn Report?
In February of last year, the Carl Icahn launched the website, which was supposed cover the latest thoughts from the famed investor. Yet, he hasn't had a new post since this April, when he re-appropriated a commentary he originally wrote for the Huffington Post. After reading his letter to the board of CIT Group, I'd like to see him devote a little more time to the website.
In his letter, Icahn took on CIT Group's reorganization plan, saying that CIT is overpaying for a term loan in order to pay off the key constituencies, who will be voting on its exchange offer.
Were the transaction a simple financing with no requirements to vote in favor of the company's proposal, we would attribute the exorbitant payment to continued incompetence on the part of a Board and management team which has brought the company to the brink of bankruptcy. (This new credit facility, the existing term facility and the Goldman Sachs swap financing completed in 2008 are only a few recent examples which demonstrate that those running the company are incompetent, or worse, when seeking funding in the capital markets -- disturbing given that CIT is a financial institution for whom the capital markets are its lifeblood). However, what is even more reprehensible than the wasted money is that this money is being used to buy votes to entrench and protect the current Board.
It's a bit biased, sure, but it's clear and concise and packs a punch that they don't teach in journalism school.
A new work of fiction hitting bookstores is targeting M&A. "Pink Slips and Parting Gifts," authored by former HR consultant Deb Hosey White, centers around the fictional Easton Co., which is sold to the highest bidder. As the title foretells, layoffs and benefit cuts follow, as Hosey White seeks to provide "an intimate -- and sometimes humorous -- look at the human fallout of business decisions," according to the book's marketing materials.
While the novel is a work of fiction, there is an interesting parallel with a current Fenway Partners portfolio company, Easton Bell Sports Inc. Fenway acquired aluminum bat-maker Easton and merged the company with helmut manufacturer Riddell Bell Holdings. The company did shut down a Van Nuys manufacturing facility following the deal, but hasn't incurred any restructuring charges this year, according to public filings.
Perhaps debunking Hosey White's premise, Easton Bell's investors actually planned to infuse more equity into the company after it fell out of compliance with the leverage ratio test of its senior secured credit facility. Of course, Fenway took a dividend out in 2006 shortly after the merger, proving once again that the truth is a bit more nuanced than fiction.
1 Comments
Ken,
Thanks for mentioning my book (Pink Slips and Parting Gifts) in your recent blog posting. The book is certainly fiction, but it was inspired by very real events: the sale of a retail and community development REIT to competitor several years ago. In the reality underlying my novel, the sale was certainly not the financial success of the Fenway/Easton Bell merger since the acquiring company spun into bankruptcy due in large part to the debt it took on as part of the deal.
But the premise behind my book is not primarily financial; it is a look at the human impact of this sale/merger: employees who lost jobs, retirees who lost benefits, and a community that lost a vital corporate presence. I suspect there is a human side to the closure of the Van Nuys manufacturing facility in the deal that you outlined as well.
Again, thanks for the mention.
Regards,
Deb Hosey White
Posted by: Deb W | October 22, 2009 1:45 PM
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