Investors Beware!

It is fortunate for Wall Street’s institutionalized criminals and looters of investor assets that Ben Stein likes acting. Because that leaves this skilled x-rayer of corporate fraud and greed with less time to produce more of his incisive articles in major media outlets like the New York Times or Barron’s. And even less time to follow up his revelations with petitions to the Securities and Exchange Commission to stop these sophisticated robberies.

Ben Stein is a lawyer, economist and writer, when he is not doing parts in television and Hollywood movies or hosting game shows on cable, where guests match wits with him. Because we are both committed to protecting the millions of unorganized investors in America (he supports our campaigns), I tried to persuade him to do more writing and less acting.

Who in this country can better sniff out, discern and convey, in clear English, all those artful shenanigans that these financial lizards strive to slide beneath the public’s and regulatory agencies’ radar? Ben is too honest to suggest any other names.

On September 3, in the Sunday New York Times, Mr. Stein wrote an article on management buyouts of their company’s shareholders which he declared should be “illegal on their face.” These deals are occurring with greater frequency because the market corrections have left companies’ stock prices below their real asset value.

Working with private equity firms, investment banks, or other pools of capital, these company bosses sniff the big difference and see gold for themselves. Why manage the assets for the share-holders for good compensation when they can do these buyout schemes and receive many times their current generous pay — maybe even getting super-rich if later the private company is taken public again?

Ben Stein proceeds to give three reasons why such buy cheap, sell dear, moves by management should be prohibited.

First, there is the breach of fiduciary duty. “Managers,” he says, citing settled law of trusts, “are bound to put the interests of stockholders ahead of their own, in each and every situation.”

Second, Managers are “supposed to avoid any conflicts of interest with their trustors, the public shareholders, or even the appearance of it.” In these cases, managers want to pay the least for their shareholders’ assets while the latter expect to get the most. Unfortunately, the investors are not informed about this lucrative gap. But the buyout investors are told about this windfall by management.

Third, what follows is something called “insider trading.” Mr. Stein writes: “What is a management buyout other than trading not just some but all of the shares of the corporation based on inside knowledge of just what the company is worth? How can this be allowed? How long until a wary court notices? Or Congress? Or the S.E.C.?”

Right on Ben! You’ve asked the question, punctured the myth of the “fairness letter,” extruded by some investment bank for a nice fee, so now when are officialdom’s answers coming?

A few days later in the September 8th Wall St. Journal a headline blares “In Some Deals, Executives Get a Double Payday.” After noting that private equity firms have “notched seven of the 10 largest leveraged buyouts of all time this year,” the reporters go on to show how these maneuvers produce their double-header of gold mines. Then as if to show their naivete, they add: “Shareholders have the ultimate say: They can always vote a deal down.”

Are these fellows auditioning for Saturday Night Live? (I recommend Ben Stein to be one of this fall’s hosts) The shareholders are not given the facts. Indeed they are deceived by false salesmanship. They are not organized. What’s more, the system is so rigged by corporate rulers that the owners of the business can’t ordinarily even get each other’s names to mount an offensive. And the whole uphill struggle is very expensive. The owners have to pay their own bills. While management is lunching off the company’s overhead in many ways.

Along with the overly passive institutional investors, there are tens of millions of small investors in America. Over the years some publicized attempts have been made to reorganize them. They have failed. The outrages through ever more devious arrangements keep growing and the stakes skyrocket into the billions of dollars.

Another try at forming a powerful organization of investors — starting with a few hundred thousand of them with a professional staff to champion their causes in the courts, at the Congress and before the Securities and Exchange Commission is very much needed.

Three men could make this happen quickly. They are John Bogle, founder of the Vanguard Funds, Arthur Levitt and William H. Donaldson, former Chairs of the S.E.C. All of them are very well connected with other like-minded professionals.

All of them are well-off. And all of them are at that age in their life when concerns about — ambition, status or lucre — are behind them and they can focus on the fundamental principles of investor fairness. They can warn that someday, if reforms are not installed, the forces of unbridled greed could bring down the whole porous architecture of the securities market.