Bryan Marsal on the Unwinding of Lehman Brothers

Enjoyed this interview from July 09 with Bryan Marsal of Alvarez & Marsal on the unwinding of Lehman Brothers:

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What Galleon Teaches Us

By Eric Jackson
11/04/09 - 06:00 AM EST

Stock quotes in this article: AMD , INTC , IBM

The government's case against Raj Rajaratnam, founder of hedge fund Galleon Group, on the charge of insider trading alleges that the hedge fund manager's primary competitive advantage for investors was a web of connections close to or inside technology companies feeding him illegal tips on future directions of the companies' stock prices.

What's shocking is how Rajaratnam is accused of having, over at least 10 years, cultivated a network of insiders feeding him nonpublic information about future earnings announcements from public companies like AMD(AMD Quote) (including its former CEO), IBM (IBM Quote) Intel(INTC Quote) and some of their most prestigious advisers like McKinsey & Co.

Why would so many bright, high-ranking people at such successful companies get caught up in such activities? Perhaps they craved access to a man whom Forbes recently ranked as the 262nd richest American, worth $1.8 billion and in the top 40 of hedge fund managers.

In a recent PBS "Frontline" episode on Alan Greenspan, the program made the allegation that the former Federal Reserve chief and acolyte of free marketer Ayn Rand had once joked with former head of the CFTC, Brooksley Born, that the two of them would never get along because she believed in prosecuting capital markets crimes and he didn't. He supposedly went on to explain that his strong faith in free markets made him believe that it was unnecessary to go after white-collar criminals through any kind of enforcement program.

Instead, Greenspan believed that market participants would ferret out ill-gotten gains and punish those people for their crimes by starving them of future capital. Such efficiencies would likely occur before the governmental regulatory body even knew something nefarious was going on.

Although I'm a proponent of unencumbered free markets, this point of view, whether Greenspan held it or not, is laughable. Bernie Madoff has blown this argument out of the water. And now we have the case of Rajaratnam, his decade old hedge fund, and his alleged 10 years of generating alpha through profiting on illegal insider information.

As a hedge fund manager, I look positively on this development. If illegal activity is going on by fund managers, it deserves to be highlighted and prosecuted. Investors will learn to ask tougher questions as part of their due diligence, and capital will ultimately flow away from managers posting false performance numbers to those who are truly generating alpha.

The hedge fund industry has to be one of the most Darwinian industries of any in the world. You don't get to keep your job by being the boss' son or being friendly with the right managers above you. You get to keep your job (and paid well if you do it consistently) by beating the market. You lose your job otherwise.

Perhaps because of the big potential rewards for success, it shouldn't be surprising that some aspiring and existing managers would try to bend the rules to get or stay on top. What this case shows is that ethical managers and investors are better off with a strong enforcement office at the SEC. The industry itself is not going to highlight the next cheater and investors -- even very sophisticated ones -- cannot do this themselves.

I know many hedge fund managers who've expressed mixed feelings about the Galleon case. They're happy that illegal activities by their competitors are being halted, but they worry the case will inspire more unnecessary red tape and heavy-handed oversight. The SEC is faced with a challenge in keeping ahead of the latest and greatest tricks employed by some managers to gain a performance edge.

However, the agency appears to have been pretty creative in coming up with some ways of identifying and tracking alleged illegal behavior in the Galleon case. Hopefully, it will begin to hire more people in the enforcement division with real-world Wall Street experience and not just more bureaucratic lawyers, as was criticized by Harry Markopolos in the Madoff case.

There's been a lot of discussion of getting hedge funds to register with the SEC as an important way for the agency to keep tabs on the potential risk these funds pose to the financial system. It's important, therefore, to realize that Galleon was registered -- its assets under management at one point last year topped $3 billion. More budget resources targeted towards enforcement would be taxpayer money better spent than registration for registration's sake.

Finally, a word of caution on the Galleon case. Although criminality ought to always be prosecuted to the fullest extent, Galleon and Rajaratnam deserve the right to defend themselves in court. What if they are innocent, after having announced they would be winding down the firm two business days after news of the arrests first broke? Could they ever truly be made whole by the SEC if that happened? That Orwellian possibility should send shivers down the spines of hedge fund managers everywhere.

Mark Cuban has never run a hedge fund, but what if he had when the SEC came after him last year for purportedly trading on insider information in the small-cap stock Mamma.com? If he'd had a hedge fund at the time, it likely would have also had to be wound down when details of his arrest first emerged. The SEC later dropped the charges, although it recently made some noise about bringing them back.

Wrong-doing deserves to be regulated and prosecuted by the SEC. The government should devote more resources to enforcement with the best qualified people involved. A few correct convictions will have a ripple effect throughout the hedge fund industry and discourage illicit behavior.

However, the SEC needs to realize it is playing with people's lives and livelihoods here. Investors will -- understandably -- redeem first and ask questions later when the agency launches actions against a fund or fund manager. They have a responsibility to do their jobs to the best of their abilities, as do hedge fund managers and senior executives within public companies.

Jackson's fund holds no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Evan Bayh: Hypocrisy on the Public Option

By Eric Jackson
10/28/2009 3:57 PM EDT
Click here for more stories by Eric Jackson

Evan Bayh, the junior senator from Indiana, is in the middle of a heated debate in the Senate on whether a public option should be included as part of President Obama's health care reforms. An organizer of a group of so-called Senate Blue Dog Democrats, to date, Bayh's been a staunch opponent of any changes to the status quo in this debate.

He's worried aloud that any public option would be a nod to socialism and counter to his principles as a fiscal conservative. When pressed on the issue, he's said he's simply a vessel reflecting the views of his Indiana constituents.

Yet Bayh, who until very late in the campaign last year was considered a top contender to be Obama's vice president, is at best naive and disingenuous, and at worst supremely hypocritical in pushing his views as those of his voters.

His wife, Susan Bayh, sits on the board of WellPoint (WLP - commentary - Trade Now) in her hometown of Indianapolis. Over the last six years, Susan Bayh has received at least $2 million in compensation from WellPoint alone for serving on its board.

She joined Anthem Insurance (the precursor organization to WellPoint) in 1998, when she was 38 years old and a midlevel attorney working for Eli Lilly (LLY - commentary - Trade Now). Her work experience prior to her stint at Lilly was five years as a junior law professor at Butler University in Indianapolis. Her work background at the time she was appointed to the Anthem board would have been surprising, given that she had no insurance experience and was relatively young and inexperienced to serve as a director on a multibillion-dollar board.

However, Susan Bayh had one competitive advantage that made her stand out as attractive to Anthem: She was married to Evan Bayh -- former governor of Indiana who, in 1998, was elected to the U.S. Senate.

Susan Bayh's corporate directorships provide a significant chunk of the Bayh family income. In addition to the $2 million she's received from WellPoint since 2003, she has received likely double that from additional corporate boards she has sat on. Last year, for example, she sat on four other boards besides WellPoint's.

She collected $656,062 in cash and stock for all her board work last year, but half ($327,000) came from her WellPoint directorship. Because she first started taking work as a corporate director in 1994 (when she was 34 -- when Sen. Bayh was still Gov. Bayh), she has served on 14 boards.

She's actually cut back on her directorships in recent years. In 2006, she served on six corporate boards and received just under $1 million in total compensation for the year. That year, Evan Bayh received the standard $165,000 annual salary for serving as a senator.

According to reports he filed that year, Susan Bayh's stock holdings were worth between $1.3 million and $2.7 million that year. Their family's total net worth was between $4.3 million and $15.1 million that year, not including a $1 million home in Washington owned in the name of Susan Bayh.

You don't build that kind of nest egg on a government salary. The Bayhs' wealth is completely thanks to Susan Bayh's numerous corporate directorships.

Quick Stock Sales

But make no mistake, these corporate directorships for Bayh are a cash ATM for her family. Remarkably, although Bayh has always been paid for her work on the WellPoint board in a combination of cash and stock, she has immediately sold her stock as soon as she can. She has never held stock in WellPoint for longer than a year.

If you examine the latest proxy filing with the Securities and Exchange Commission, it shows that Bayh owns exactly zero shares in the company (more than a decade after first being appointed to the board). She's the only director who doesn't hold any shares.

What does this say? To me, it clearly shows that she has no long-term interest in seeing WellPoint's stock price increase. She's there to get her cash and stock and cash out as soon as she possibly can. She's doing this for the money, not for the benefits of seeing shareholder value increase.

There is more proof that Susan Bayh seems oblivious to the concept of increasing shareholder value -- the very purpose of a corporate director -- through effective monitoring of the company's management.

Since 1994, she has served as a director for a small Indiana radio company called Emmis Communications (EMMS - commentary - Trade Now). This is a company with a $40 million market capitalization. Bayh currently serves on the compensation committee. For some unfathomable reason, despite Emmis' tiny size, Bayh has agreed that Emmis should have a corporate jet.

The CEO and COO/CFO are able to fly on the jet for personal use -- paid for by Emmis' shareholders -- at a cost of almost $100,000 last year. This is simply a ridiculous waste of money. A company this size should see its execs flying AirTran (AAI - commentary - Trade Now) and Southwest (LUV - commentary - Trade Now), not in a corporate jet.

A tip to Susan Bayh: When your company's stock is down 93% over the last five years and is being warned that it will be delisted by Nasdaq, it shouldn't own a corporate jet.

I don't begrudge the Bayhs making money; this is America. However, I am highly dubious when I read that Evan Bayh has repeatedly said that he is not influenced by the corporate ties of his wife.

In 2007, he told the Fort Wayne Journal Gazette: "I can honestly tell you that if my wife did not have a job, none, I can't think of a single decision I've made that would be any different. I look at what's best for our state and our country and my own conscience. My integrity matters more to me than anything, so I always do what's right for the people who put their trust in me."

He points out that lobbyists for his wife's companies aren't allowed contact with his staff as proof of the ethical wall that exists.

Yet Evan Bayh, Susan Bayh and WellPoint seem to share almost identical views on health care and the current public option debate. Bayh recently refused to commit to voting for cloture on a bill with a public option saying: "It's not fair to ask people to facilitate the enactment of policies with which we ultimately disagree."

Susan Bayh recently argued to Business Week that, "Traditional Medicare pays for quantity rather than quality, and all of the pilot programs that were intended to help government change that ... have failed." She strongly opposes any public option and instead supports reforms that would require everyone to own private insurance plans so that "everyone is in the pool."

WellPoint, the largest health insurer in the country, has 80 million customers who buy private insurance. It would greatly benefit from any government initiative to encourage more people to buy more private insurance. To that end, WellPoint spent $2.6 million in campaign contributions in 2008 for Democrat and Republican candidates. (Evan Bayh himself received more than $500,000 in campaign contributions from the health care industry in 2008.)

(Calls to Evan Bayh's Senate office and WellPoint public relations were not returned by the time this article was published.)

While my personal views on health care favor a market-based rather than a government-based solution, I find the hypocrisy of Evan Bayh highly offensive. You would have to be clueless not to see the conflict of interest of his views on this topic and the personal gain his family stands to reap as a result of his wife's connection to WellPoint, if his stated views -- in the name of his constituents -- are seen through.

Evan Bayh, Susan Bayh and WellPoint all look bad here. Until he recuses himself from votes on health care or she resigns from the WellPoint board, criticism of them on this topic will deservedly continue.

At the time of publication, Jackson had no positions in stocks mentioned in this article. Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Icahn't Should Hang It Up

By Eric Jackson 10/28/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , MOT , CIT , BBI , TELK , GFGFQ , CSCO

NEW YORK (TheStreet) -- After a string of disastrous investments and his departure from Yahoo!'s(YHOO Quote) board last Friday, it's time for Carl Icahn to hang it up running other people's money. Here's why.

Icahn's decision to leave the Yahoo! board comes a year after mounting a costly and distracting proxy contest to get elected. That's his right, of course. After all, investors in his Icahn Partners hedge fund were the ones who footed the bill for his efforts.

Those same investors -- including Icahn himself -- are also sitting on a loss on their Yahoo! investment. We don't know the exact magnitude of the loss but it appears, based on a review of the SEC filings, to be on the order of -23% or roughly $320 million on 60 million shares held at the end of June. Icahn's stated reasons for stepping down from the board were that he no longer had the time and Yahoo! no longer needed an activist.

If he's right, then someone should inform Icahn's buddies John Chapple and Frank Biondi, who came on Yahoo!'s board last year with Icahn. Their whole legitimacy for serving on this board is now in question based on Icahn's comments. They should make like their buddy and head home to Manhattan. And with Yahoo!'s stock at less than $17, far less than Microsoft's(MSFT Quote) offer of last year, it seems incorrect and premature to declare the company a success and not in need of further changes.

Yahoo! investors might correctly wonder: Why the heck did we elect you to represent our interests in the first place, if you're now leaving?

It's true that Icahn's busy tending to other investments in his portfolio with the aim to turn around the performance of Icahn Partners. The fund, which had a three-year positive run starting in 2004, reportedly showed its first loss in the third quarter of 2007, due to poor bets on Florida condo developer WCI and auto parts maker Lear(LEARQ Quote). Since then, WCI and Lear have gone bankrupt, costing Icahn's fund at least a couple of hundred million dollars.

Icahn's hedge fund performance continued to drop in 2008 (down 22% in Q4 alone) and 2009 (down 33% in January). His 60 million Motorola(MOT Quote) shares -- owned since at least December 2007 -- look to be down about $660 million. Motorola's decline came despite Icahn having fought for and winning board seat representation last year.

Icahn Partners was hit by $1 billion in redemption requests at the end of last year and Icahn injected $250 millionof his own money earlier this year. Even today, Icahn Partners' long positions total $2.7 billion through the end of June . That's significantly less than the $4.9 billion in long positions he heldone year earlier .

Icahn's strategy is to take large long concentrated equity positions without using options or pair trading to manage the additional risk, as well as buying up cheap debt. You can ride that train up when markets are good, but get crushed in a down year like last year.

The biggest thing taking up Icahn's time these days is an investment in CIT(CIT Quote). Some are reporting that he will become the biggest shareholder of the company under reorganization. Creditors will decide by Oct. 29 whether to push the company into bankruptcy or accept an offer to refinance its debt. Icahn wants the company to refinance its debt through him, saying the fees he'd collect from the company would be less than the other offer on the table.

Icahn likes buying up debt and bringing companies through the bankruptcy process. He followed a similar path to the one he's on with CIT at XO Holdings(XOHO Quote). In that instance, he effectively gained control of the company as a large debt-to-equity owner.

But he's being sued right now by R2 Investments, an 8.8% holder in XO. R2 contends Icahn turned down at least one buyout bid for the company higher than its then share price in favor of refinancing its debt by purchasing $780 million of preferred stock. In doing so and gaining 80% control of XO, R2 alleges Icahn was able to use the company's losses to offset taxes he would have otherwise had to pay on other businesses he owned. XO, which was trading at $1.27 at the time of the buyout offer that R2 says Icahn turned down, is now trading at $0.77 - a 39% decline.

Besides recent poor investments in Blockbuster(BBI Quote), Telik(TELK Quote), and Guaranty Financial(GFGFQ Quote), his entire Yahoo! foray since last year has been an unqualified failure. It will make future activist campaigns he launches more difficult to execute.

From the moment he launched his proxy fight last year, after Yahoo! turned down Microsoft's $34 a share verbal offer, investors were skeptical of Icahn. They perceived him as a quick flip artist wanting to juice the stock from $23 to over $30, without technology experience to effectively advise the company as a director.

Because he lacked support from institutional investors, Icahn knew his proxy fight might fail to get any of his nominees elected when put to a vote. Therefore, he accepted three seats on the board as a compromise. If you can't win against the wildly unpopular Yahoo! board after making a mess of the Microsoft negotiations last year, what does that say?

Icahn says he helped select Carol Bartz for the top job. Really? Wouldn't Jerry Yang have done it anyway? After all, it was Jerry who offered Terry Semel the top job in 2001. It was Jerry who got to be CEO in 2007, when he told his board he wanted it. And, it was Jerry who knew Carol from Cisco's(CSCO Quote) board and, by Carol's account, offered her the job.

Icahn's friend, Frank Biondi, got to hitch a ride on to Yahoo!'s board on Icahn's coattails. Biondi also joined Yahoo!'s compensation committee and approved Bartz's employment contract. This is the contract that will pay Carol $187 million for four years of work, if she hangs around that long, maxes out her possible annual bonuses, and if Yahoo!'s stock price rises above $25 for 20 consecutive trading days before 2016. That's a good deal for Carol -- not so great for Yahoo! shareholders.

We know that Icahn Partners' investors didn't get a great deal on Carl's involvement with Yahoo! over the last year. However, Icahn, Biondi, and Chapple seem to have done pretty well. According to Yahoo!'s proxy filing, the day these three men were elected to the Yahoo! board, Yahoo! gave each an option to purchase common stock with a grant data fair value of about $250,000 and restricted stock units with a grant date fair value of about $200,000.

This half-a-million-dollar payment went to them personally. Nowhere in the filing does it say that this money went back to Icahn Partners, which funded the expenses related to the proxy contest -- which most estimate cost at least $1 million.

In that same proxy filing, Yahoo! disclosed that, last year, "transactions in the ordinary course of business between the Company and entities for which the following directors served as an executive officer, employee or substantial owner, or an immediate family member of an executive officer of such entity" included "Mr. Icahn". No more information is given, but it would be interesting to know just what transactions were conducted, with whom, for how much, and for what services.

To most outsiders, it appears as though Icahn was summarily ignored by the parties around Yahoo! before and after he was elected to the board. He assumed that he could force a shotgun marriage between Microsoft and Yahoo! He assumed his initial $23-a-share investment could be quickly goosed to $32 or higher. He was wrong.

Steve Ballmer politely listened to him and then apparently stopped taking his calls. Carol Bartz has dissed him from the get-go of her tenure as CEO. She proclaimed to Forbes last year : "Icahn is just another shareholder. What's he going to do, fire me?"

Whether he realizes it or not, this attitude is probably the most damaging thing to Icahn going forward as an activist investor. CEOs and corporate boards will no longer see him as "Carl Icahn: Corporate Raider of the 80s" but "Carl Icahn: Has Been." In their eyes, he'll be Icahn't, not Icahn.

Carl Icahn will always have a reputation as a successful investor. Forbes recently pegged his net worth at $9 billion. Yet, it's unclear whether his hedge fund, Icahn Partners, will continue after his death.

While George Soros, 79, and Julian Robertson, 77, have repeatedly developed talented managers (like Stanley Druckenmiller, Lee Ainslie, and John Griffin) who go on to successful careers, Icahn, 73, has not. If Icahn was hit by the proverbial bus tomorrow, it's unclear that Icahn Partners could or would continue.

Icahn will always be able to grab the headlines with some outrageous comment about a CEO because he's become the "poster boy" for activist investing. He could keep running money and probably will. However, as he takes his leave from Yahoo!, it appears as though his most influential days as an activist investor are behind him and not in front of him.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Frontline's Report on the Battle to Regulate OTC Derivatives in 1998

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Steve Wynn on his purchase of a plane for Garth Brooks

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How to Make Transparency Work

By Eric Jackson

10/21/09 - 06:00 AM EDT

Stock quotes in this article: RMG , MCO , MHP

NEW YORK (TheStreet) -- Lawrence Lessig's recent thought-provoking article in the New Republic challenges the assumption that more sunlight is always a better disinfectant for corruption and bad behavior than less.

Although his primary focus is on how more transparency doesn't always lead to better political outcomes, there are obvious implications of his argument to the world of corporate governance and executive compensation.

The critique, entitled "Against Transparency: The perils of openness in government," offers a partial explanation of why, even after Enron and Worldcom when everyone agreed that corporate boards screwed up in overseeing their companies, boards failed again in the recent mortgage bubble. It also suggests what must change now to finally improve corporate governance and executive compensation.

Lessig's argument is that it's become accepted wisdom on both sides of the political aisle in recent years that more transparency is always better. And, in an age of super-computers and ubiquitous access of the Web, it has become easier than ever to make data available.

The assumption many make is that making information available will curb bad behavior before it happens, because the actors will know they are subject to being called out.

Lessig challenges this by using the example of publishing a politician's calendar online. Does this level of information really help the public better judge his or her actions? Does it encourage the politician to behave more justly, knowing others will see his or her breakfast meeting took two hours instead of one last Thursday?

Lessig worries that more information disclosure can have the pernicious unintended consequence of making market actors believe that they don't have to worry about particular problems because they have been disclosed.

Yet, more of a data dump doesn't mean that the data will be processed and acted upon correctly. In fact, more data dumps -- especially in areas like corporate governance that aren't well-understood -- probably make it less likely that bad behavior will be singled out than many would assume.

Lessig is not arguing against transparency in favor of us returning to the crony capitalism world of back-room deals and Russia-style payoffs. He is arguing against a Pollyanna-ish view of the benefits of "naked transparency." Anyone in favor of better corporate governance and aligned executive compensation with performance would be an ostrich not to critically review Lessig's article and think about its implications.

The world of corporate governance is not well-understood by the public or general business journalists. Who but general counsels and governance wonks really understand how corporate by-laws, board selection, and governance-related disclosures in SEC filings work?

There are relatively few people around to actually challenge governance matters in companies -- and a majority of them people are already working as general counsels at companies protecting them from criticism.

In terms of more data not always being better, think of the Securities and Exchange Commission's landmark decision in the early 1990s to require companies to disclose executive compensation. As Lessig points out, instead of resulting in shame keeping a tamper on things, more transparency has inspired jealousy and creativity from compensation consultants and tax attorneys, further accelerating the stratospheric climb of executive compensation.

You can't put toothpaste back in the tube. Transparency and disclosure are here to stay and they certainly do help keep bad behavior in check. But, clearly, some changes need to occur as bad corporate behavior continues apace.

If you think general business journalists will save us, keep waiting. Lessig points out that one of the effects of the decline of mainstream media's traditional revenue sources has been the elimination of investigative reporting.

Less than 10% of large U.S. newspapers employ four or more investigative reporters -- and of those, it's likely scant few of those reporters have any background in corporate governance or executive compensation to be able to take on this topic. Forty percent of large newspapers have no investigative reporters.

If not journalists, who could challenge corporate governance and executive compensation transgressions? Institutional shareholders will only speak to companies privately and on a limited basis. Retail shareholders don't have the time, inclination, or expertise to do this regularly. Research analysts want to curry favor with management. Employees want to keep their jobs.

I actually believe it is the proxy advisory firms (like RiskMetrics(RMG Quote) , Proxy Governance and Glass Lewis) and credit ratings agencies (like Moody's(MCO Quote) and Standard & Poor's, a subsidiary of McGraw Hill(MHP Quote) that are best positioned to play this role. However, to do so effectively, they would have to eliminate conflicts of interest in their own firms.

RiskMetrics, formerly ISS, is the market leader in the proxy advisory space. Many institutional investors use RiskMetrics or other proxy advisory firms as cover for how they vote their proxies. If the pensioners for XYZ pension fund ever raised hell that their fund voted in favor of re-electing a board of directors for a future Enron or Lehman, the fund can blame RiskMetrics for telling them to do so. RiskMetrics happily accepts these fees for being investors' most preferred scapegoat.

The problem here is that RiskMetrics has its fingers in too many pies. They sell consulting services to public companies to tell them how to improve their internal practices (and presumably be viewed in a better light at proxy voting time). They also have started selling corporate governance ratings tools to companies and investors to better understand how to improve their corporate governance practices.

Companies will sometimes tout in press releases how the RiskMetrics Corporate Governance Quotient tool assigned them a 95% rating on corporate governance. They'll later complain if the proxy advisory side of RiskMetrics recommends against some or all of the board at a future meeting.

Others have complained about RiskMetrics' unchallenged clout leads to unfair judgments. One activist investor involved in a battle at a small-cap Canadian company, recounted how he was given 15 minutes to brief a 20-something analyst from RiskMetrics at 4:30 p.m. on a Friday before a long weekend. RiskMetrics came out the next week in favor of the incumbent board, despite many good reasons for withholding votes.

On the other side, one corporate director recently complained to me that Glass Lewis had recently recommended against his re-election based on his age and that he served on too many boards -- even though the majority of his other boards were subsidiaries of his main board. He claimed that they didn't require substantial additional time demands of him. "I was never contacted by them before they made their recommendation and I have no idea who I call to complain now," he said.

The simple solution here for the proxy advisors is to break up the consulting services from the ratings services, so there is no conflict. Ensuring there is sufficient competition will also help them keep their quality up.

The problems of credit ratings agencies' poor ratings and a pay-to-play business model are well-documented. Yet, these groups have the infrastructure, reputations, and could build up the expertise in corporate governance to level judgments against companies. Like proxy advisory firms, market actors would pay attention to their views if they could get their house in order.

Some will advocate for a government agency to bridge the gap here on being a domain expert overseer on topics like corporate governance and executive compensation. However, Ken Feinberg's tenure as pay czar -- however, well-intentioned -- makes me skeptical that such a solution could really be effective in the long-run.

Those of us in favor of better corporate governance and tighter links between executive pay and performance need to see the truth in Lessig's critique of transparency. More data dumps in to the backs of SEC filings won't fix anything. We need domain experts looking at every board, every deal, and every potential transgression, rendering judgments. Fixing the proxy advisory and credit ratings firms is the best way of doing that.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson did not have any positions in the equities mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Talking with @Misstrade about Activist Investing

I recently chatted with Matt Davio (@Misstrade) about activist investing, Microsoft (MSFT) and more. Thanks, Matt, for the opportunity to talk.

Eric Jackson @ericjackson part 1 and MissTrade Talk Activist Investing from miss trade on Vimeo.

Eric Jackson @ericjackson Part 2 Activist Investing from miss trade on Vimeo.

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Yahoo!'s Defense of CEO Stock Sales Is Lame

By Eric Jackson 10/14/09 - 06:01 AM EDT

Stock quotes in this article: YHOO , MSFT , ADSK

NEW YORK (TheStreet) -- Yahoo!'s(YHOO Quote) responses to recent criticism of CEO Carol Bartz's stock sales have completely missed the point and appear designed to obfuscate. If she wants to show real leadership, she needs to stop misleading shareholders.

Let's review the recent controversy. Last month, I noted how Yahoo!(YHOO Quote) officers and directors sold $233 million in company stock but purchased only $103,000 worth of shares over the past two years. This was all spelled out in Securities and Exchange Commission filings.

I created a simple spreadsheet tabulating the sales and purchases and published it online. It quickly drew the attention of the media, which primarily focused on how new CEO Carol Bartz has sold almost $2 million in stock in her first five months on the job.

Since then, Bartz denied that she sold anything -- once on CNBC and once at the New York press event at which she launched Yahoo!'s new $100 million marketing campaign.

These sales were not open-market sales but related to the vesting of restricted stock units (RSUs) Bartz received from Yahoo! in 2009 as part of a $10 million "makeup grant" designed to compensate her for options she left on the table when she left her part-time executive chairman role at Autodesk(ADSK Quote) to take the helm at Yahoo! in January.

Bartz's initial tactical response to the criticism about the stock sales seems to have been: "Damn the filings, I'm going to deny, deny, deny." Perhaps she thought that if she denied it forcefully enough, the issue would just go away.

Yahoo!'s public relations team has taken a more nuanced approach. In response to questions from the Guardian and CNBC about the issue, they explained that the sales were due to taxes Bartz owed on the vested stock. Therefore, they suggested, these weren't "real" stock sales and were no cause for alarm for investors.

These responses fail to address the real issue, though. I've never said these are open-market sales, although they certainly qualify as sales (as the SEC filings show). And I have criticized Bartz for not digging into her own pocket to pay the taxes owed on the vested stock instead of selling parts of those stock grants to do so. Obviously, I can understand why more junior employees choose to sell vested stock to pay their taxes, but senior executives like Bartz have the money to easily cover their tax bills. I'm assuming Bartz thinks her actions as CEO can help Yahoo!'s stock go up in the future. In order to show her confidence in her own leadership -- and in Yahoo! stock -- she should pay the taxes herself and keep all of her vested shares.

Last week, I highlighted in a blog post that Bartz sold another $1.3 million at the end of September, again selling some of those third-quarter vested shares that were part of her "makeup grant" in order to pay her taxes.

Yahoo!'s public relations team objected to this latest post from me, calling my assertions on this and Bartz's other sales "inaccurate and misleading." They pointed out Bartz didn't make an open-market sale. I never said she did. They noted that Bartz's "makeup grant" was previously disclosed. That's what I said in my prior criticisms. They stated that the company "currently" withholds a portion of vested stock in order to pay taxes for "all" employees receiving vested stock because it is "practical" and added that "many companies" do the same. As I've said before, if Carol Bartz wanted to pay her taxes on this vested stock so she could keep all the Yahoo! stock possible, would some human relations bureaucrat at the company have told her no?

As a follow-up, Yahoo!'s public relations team was asked to point to the previously disclosed filing showing that Bartz was required by Yahoo! not to pay taxes herself on the vested stock she received from the company as part of her "makeup grant." In response, Yahoo! pointed to the company's 10-K filing made last February and specifically referred to exhibit 10.17(D) in that filing.

The exhibit lays out the specific terms of the employment agreement that Carol Bartz negotiated with the company relating to stock grants she is to receive. Indeed, the exhibit states that Yahoo! will withhold some of the vested stock to pay Bartz's taxes. However, that same section goes on to say that "[i]n the event the Company cannot (under applicable legal, regulatory, listing or other requirements) satisfy such tax withholding obligation in such method", Yahoo! might have to require Bartz to "pay such amount in cash or check."

There's nothing in this exhibit that says Bartz couldn't pay her own tax bill herself on the grant if she wanted to, in order to keep all her vested stock. Indeed, it's interesting that Exhibit 10.2(F) in the same filing, which refers to situations where all employees (not just Bartz) exercise their stock options and owe taxes, says Yahoo! requires them to pay the tax bill. This can be done by selling a portion of their exercised stock options or paying "cash or check" out of their own pocket. This latter option is exactly what I argued Bartz should have done -- from a leadership perspective -- with respect to her "makeup grant."

My comments about Bartz' stock sales and her egregious pay package, which was approved by Yahoo!'s compensation committee in January, have been neither inaccurate nor misleading. From a shareholder's perspective, Bartz shouldn't have sold these shares in order to pay taxes on them. To demonstrate her belief in the long-term value of the shares, she should have paid the tax bill herself.

The group deserving the most blame in this compensation debate is, of course, Yahoo!'s compensation committee, which signed off on Bartz's employment contract. The committee is chaired by Art Kern and has members Ron Burkle and Frank Biondi, Carl Icahn's right-hand man. They should be ashamed of the following aspects of Bartz's employment agreement:

1. If Bartz sticks around for four years and maxes out her possible annual bonuses and if Yahoo!'s stock price trades for more than $25 for 20 consecutive trading days before February 2016 -- seven years from now -- she will receive a total compensation package for her four years of work of $187 million. Although Yahoo!'s stock was trading around $12 when she took the job at the start of this year, is it really that much of a "stretch goal" for Bartz to get Yahoo!'s stock above $25 for 20 straight trading days in the next seven years? After all, getting the stock back to $25 would bring it to a level that's still 20% less than what Microsoft(MSFT Quote) offered to pay for the whole company 18 months ago. This would be a lot of money for a relatively low hurdle. I'm all for executives making money for performance, but not easy money.
2. They gave Bartz a $10 million "makeup grant" in cash and stock for options she left on the table at Autodesk when she signed her Yahoo! employment contract in January. However, according to SEC filings, Bartz's remaining Autodesk options were only worth $3.3 million at that time. Why did Yahoo!'s compensation committee triple the size of the "makeup grant"?
3. When Bartz is getting a potential $187 million for getting Yahoo!'s stock back to $5 less than Microsoft's buyout offer, isn't Bartz being sufficiently "made up" for the Autodesk options she left behind? Does she need a "makeup grant" on top of all her other compensation? Most reasonable executives would conclude that getting $187 million was better than $3.3 million. This "makeup grant" was padding and should never have been given in the first place.
4. Why did Yahoo! agree to pay the taxes on Bartz's RSUs related to her "makeup grant" that she receives this year? Bartz would have had to pay her taxes out of pocket on her $3.3 million of remaining Autodesk stock options. Why should Bartz now pay taxes for a $10 million grant out of that grant, and not out of her pocket?
5. Why did Yahoo! agree to pay Bartz "up to $140,000" for the financial advice she received as part of negotiating her employment contract? This was a great perk for her, but not for Yahoo!s shareholders. Yahoo!s public relations team or Bartz have yet to account for this slap in the face to shareholders.

A majority of Yahoo!'s board deserves to be replaced for so poorly negotiating the potential buyout of the company by Microsoft. All of the members of the compensation committee deserve to be replaced for overpaying Bartz's predecessor, Terry Semel, and for approving Bartz's contract.

But let's be clear: Bartz is no babe in the woods. She's been around the block negotiating employment contracts and knew exactly what she was demanding. Her compensation, perks and tax gross-up demands are excessive. She should immediately pay back Yahoo! shareholders the $140,000 for the high-priced advisers she used to negotiate her employment contract. She should also show her shareholders and employees that her heart is in the right place when it comes to this company's future.

To that end, I call on Bartz to spend $25 million of her own aftertax income on open-market Yahoo! stock purchases. She can keep her $187 million for getting the stock back to a 20% discount to the Microsoft offer, but let's see her put some of her money where her mouth is -- and actually at risk.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund had a long position in MSFT.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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The HP Horse Doesn't Want to Run for this Jockey

My post a few weeks ago on Mark Hurd's perks at HP has generated a lot of traffic and email comments -- especially from current or former HP/EDS employees.

Here is a link from one ex-EDS'er in Germany upset at the way things have played out.

Of course, every business needs to find a way to cut costs and save -- especially in the current environment -- but there's clearly a large portion of HP employees who feel very upset at the way Hurd and HP management have gone about their cost-savings drive. Preaching cost cuts to the troops, and then turning around and living high off the hog themselves at the expense of shareholders.

I remember one time going to an HP meeting when I worked for a software company while Carly was still CEO. The meeting was at an old DEC facility in Nashua, NH. I remember it took about 10 minutes to walk from the guest entrance desk to the meeting room. Along the way, I passed dozens and dozens of empty cubicles, as jobs had been "rationalized" away elsewhere. When I finally got to the meeting room, the HP folks were all very smart and friendly, but I remember being amazed that we spent a good 15 minutes or so of small talk time discussing what an embarrassment Carly was as a CEO. I remember leaving the meeting thinking: "great people but that company is in trouble if that's how all the employees feel about their boss."

These recent comments I've received back from employees about Hurd remind me of that meeting again.

I'm sure Hurd would say these are disgruntled employees who don't get the need for "cost cutting." They don't understand the new competitive global environment we operate in, etc. etc. He probably would also say all this employee grousing will go away when the stock starts going back up again. In fact, at a recent analysts' day, he touted that HP was going to grow "faster than the market" in 2010.

Maybe. But I don't buy it. I sense deep anger and lack of trust among the rank and file with Hurd and his team. I get a sense of Hurd being the jockey on a horse that's decided it doesn't want to run any more for this jockey. He can whip it all he wants, but that horse is not going to run.

Let's see how HP's stock does next year and if it does grow faster than the market.

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