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
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