Cure for the Bad-CEO Blues: Sue Your Shareholders

Stephen Taub has an intriguing brief article in CFO.com on the latest hot new trend among blame-shifting CEOs: Suing unruly shareholders.

Vaalco Energy is trying an unsual tactic to stave off a proxy fight: suing its shareholders.

The independent oil producer filed an action against New York City-based hedge fund Nanes Delorme Partners I L.P., and Pilatus Energy SA, of Zug, Switzerland, in federal court, alleging they violated securities laws by sending misleading information to shareholders in an effort to install three of their nominees on Vaalco's board, according to the Associated Press.

One of the targets of this imbecilic junk lawsuit responded as follows:

Julien Balkany, a Managing Member of Nanes Balkany Partners LLC, the General Partner of Nanes Delorme Partners, stated: "We believe that VAALCO has great potential, but that the company will continue to materially underperform without new independent representatives on the Board. In addition, rather than provide a clear strategic plan to rebuild stockholder value, the company has chosen to evade the critical issues facing Vaalco by filing a desperate and baseless lawsuit aimed at disenfranchising stockholders and 'chilling' the democratic process and to defend its failures by launching a campaign rooted in misleading facts and unnecessary scare tactics designed to distract stockholders from the company's poor performance."

Just goes to show you how far we've come from Enron. Nowadays, bad companies add insult to the injury they inflict on shareholders by lashing out at analysts, the media, and now investors. The SEC and other regulators, meanwhile, are snoring loudly in the background.

As perfected by Overstock.com's (OSTK) wack-a-doo CEO Patrick Byrne, the name for this kind of toxic blame-shifting is known as "issuer retaliation." That was also the theme in David Einhorn's great new book Fooling Some of the People All of the Time.

Einhorn chronicled his battle royale with a scuzzy company called Allied Capital (ALD). Here's a cogent review by Jesse Eisinger in Portfolio.

Comments

[nmau]

Einhorn has been consistently wrong on ALD that continues to execute its mission and pay handsome dividends. Einhorn makes money by creating scandal from promotion.

[qi_y0]

einhorn has shown no expertise in venture capital and does not understand ald. ald has been paying dividends without interruption since 1965 (I believe this was before einhorn was born). ald sold their cmbs portfolio for a huge gain at the top of the market just when einhorn was starting to get involved with sub prime which he later took a large position in the now bankrupt new century. listen to einhorn at your own risk--

[Ed Z]

ALD is a "scuzzy company"? Why, because Einhorn says so? On what do you base this claim?

You sir are a hack.

[Bearaider]

yes, at our hedgefund we go long and short. What we like to do is take quantitative readings to determine if we can drive a stock, then we move in and buy puts, quietly, The we start shorting heavy. At this point we have English speaking MBAs of finance that are outsourced from India ($1000 per month) who jump on all the message board and slam the company. At this point we buy back the puts at a nice profit and as people sell from the sudden shock and awe and sell stops get hit we cover our shorts, quietly. It is called wealth transfer and yes the SEC is asleep at the wheel. Sometimes we even get soft media to write stories about the company or their CEO's...

[User 194542]

I think you need to go back to journalism school and learn how to do some research before writing such garbage. Einhorn is a known short seller. His tactics have failed to work in the case of ALD, including filing complaints with the SEC which has found no reason to take action after months of investigating. Now, he writes a book, and "journalists"... like you give him free publicity to hawk it. In the process, you refer to ALD as a "scuzzy company" in one sentence with no details as to your accusation. You may call that journalism. I call it hack reporting. Just another reason why the news media is held in such low regard.

[BudH]

EGY is not suing all shareholders, just this hedge fund which has used misleading tactics and hidden the true ownership of the shares. It's not a 'junk' lawsuit. Sometimes a shareholder may need to be sued.

[A EGYInvestor]

EGY management is focused on the long term growth of the company, and not trying to make a quick buck like Delorme Partners I L.P. Delorme Partners have been deceptive in the gold proxy they have sent to share holders. I applaud EGY management for suing them and hope they win and feel journalists who bad mouth EGY in supporting Delorme Partners are acting irresponseably. They really are not objective journalists, but propagandists.

[ALD is AOK]

ALD has formed a partnership with Goldman Sachs. GS will give ALD 125 million as part of a broad investment agreement, GS will buy 170 million in private equity and debt securities from ALD. ALD plans to start a fund with GE Commercial Finance is also progressing nicely. A 3.6 billion Unitranche fund, slated to launch soon. Not bad for a "scuzzy" company.
Einhorn can continue to short. I will go long ALD. Hat tip to Value Line for quality information on ALD.

[User 136934]

You present an extremely shallow analysis of the situation at Vaalco. The current management has been building an exploration and production oil company for over seven years with exemplary results. The company is just completing the evaluation of several properties in Gabon and Angola and will be drilling new wells on all it's African properties over the next 12 months. Nanes-Delorm has entered the picture in order to capture for itself the benefits of these new opportunities. They will do so whether or not their actions benefit all shareholders. Do just a little due diligence before you make stupid and uniformed comments like your article.

[DaveinHackensack]

This post should have been researched a little better. There's more to the Vaalco proxy fight than Weiss suggests. A thorough investigation of this would make for an interesting post. For management's side of this issue, here are some excerpts from Vaalco management's May 8th letter to its shareholders:

"As you may be aware, a New York based hedge fund, Nanes Delorme Partners I LP, has initiated a costly and disruptive proxy contest in an attempt to install its own paid nominees onto your Board of Directors. Nanes Delorme Partners only recently purchased its shares, and more than half of these were purchased by its newly revealed secret partner Pilatus Energy S.A. – an oil and gas company headquartered in Zug, Switzerland, whose purported leader1 was convicted and sentenced by a French court to five years in prison for fraud, embezzlement, bribery and kickbacks in “the biggest political and corporate sleaze scandal to hit a western democracy since the second world war.”2 We strongly believe that the objectives of Nanes Delorme Partners and Pilatus Energy are very different from your objectives.

[...]

Over the last 18 months, your Board and management team have laid the foundation necessary for significant increases in reserves and production. We have arranged for rigs and have concrete plans to drill seven exploration wells over the next twelve to eighteen months in areas that have similar geologic characteristics to those we have successfully explored and developed in the past.
• This current exploration program has the potential to add in excess of 50 million net barrels (after expected royalties) to our current 6.2 million barrels of proved reserves, an eight-fold potential increase. Even at a modest success rate, there exists the likelihood for dramatic increases in reserves and production over the near term.

[...]

Nanes Delorme Partners is well aware of the significant near-term upside inherent in VAALCO’s
current exploration portfolio. It is only now, when VAALCO’s stockholders are poised to realize this value, that Nanes Delorme Partners and Pilatus Energy have begun pushing for an opportunistic sale of the Company.

[...]

NANES DELORME PARTNERS AND PILATUS ENERGY ARE BUSINESS COMPETITORS TO VAALCO, CREATING SERIOUS CONFLICTS OF INTEREST"

[jjason]

Gary, I read the article in Portfolio. The author did not have any significant data on ALD that proves that Einhorn is right in his opinion of this (scuzzy) company! I posted my own comment where I said " It would be nice to have some facts about what fraud has occurred at ALD".

I, too, think you have misled us regarding ALD.

I follow ACAS, ALD, MCGC, AINV and some of the competitors of these firms. I have discovered that there are many people who short these stocks. I have also discovered (mostly on Yahoo.com message boards) that there are comments made that dump on these firms WITHOUT ANY DATA. So I wonder "Exactly what do short sellers contribute to an analysis of an investment". My answer is NOTHING. ( Go to the article in Portfolio if you have time and read the comments)

As an investor, I am looking for a return of my investment and on my investment from dividends and capital appreciation. I want companies to do well and share that good fortune with shareholders. Most CEO's share the wealth with themselves and declare dividends that are less than 4 percent. This is shameful.

ALD and ACAS have consistently paid me a dividend of eight percent or more and I have profited from capital gains as well over the past four years. I hope these two firms continue to be successful. I wish there were more companies that were as well managed.

Finally...I would make short selling illegal and pass laws that make hedge funds accountable to the SEC. I approve what Congress has just done this week in attempting to limit speculators from falsely raising the price of oil.

[Patrick1980SC]

FACT: Allied Capital is a Unit Investment Trust eligible under Regulation M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level. To qualify as a regulated investment company, the fund must meet such requirements as 90% minimum distribution of interest and dividends received on investments less expenses and 90% distribution of capital gain net income.

FACT: Allied, as a regulated investment companies must have a debt-to-equity ratio of no greater than 1:1. As a result, Allied must consistently do secondary offerings in order to increase the amount it is able to borrow to grow its portfolio.

FACT: The dividends Allied have paid have been either ordinary taxable income or capital gains -- not a return of capital.

[melbourne_yankee]

Geez - Even the EGY sis-boom-rah-rah club is here infecting this site with their blind faith in EGY management and now only to find out that that same management has done a deal with them!!

You guys will never learn!!!

[wobatus]

Ah yes, a cogent review by Eisinger, who wss spoon fed stuff by Einhorn for his WSJ column. Look at the log-rolling from Beth McClean, Weiss, etc. Ha ha. Hey, everyone knows, sometimes the shorts are right. Some companies are crap. But they shovel the shit pretty indiscriminately and make like ANY protest by those being attacked just proves they are guilty. Then they tout what a great "favor" they do by imparting the price knowledge via short sales. Great. Like other markets don't work without them. Hey, Jim Chanos, I bet folks that bought Enron stock you short sold them LOVE you.

And hey, someties the shorts are right becase they destroy a company's rep, and the price decline becomes self-fulfilling.

Weiss, you are a complete hack. Explain to me again why there are som many fails to deliever garty and why that somehow doesn't mean there are more shares outstanding at times to swamp demand?