Monday, January 26, 2009


Over the years, I have worked on a number of matters in which the CEO, owner of a significant number of shares in his/her public company, would borrow large sums and pledge their shares as collateral. This is primarily done for several reasons such as, monetizing some of their value without losing control of the company or to avoid spooking other public investors.

The problem is when the company runs into financial trouble. I first saw this happen in 1992 when Gitano, the jeans company, fell into financial distress. Although a public company, the family that had founded Gitano held a large share of the public stock. They didn't want to lessen their control over the company, so the various family members involved with the company borrowed against the stock. As you might imagine, as the company's fortune spiraled downward, the personal fortunes were even worse off.


The article in Bloomberg lays out a similiar story regarding the founders of Boston Scientific. I highly recommend reading this one because this scenario has been playing out for the past three months. I have been waiting for the right story to make this point.

As you can imagine, a number of executives of public companies are under this same pressure. In my MBA classes, I sometimes cover how financial frauds occur. When C-level executives are faced with an ever falling stock price and serial margin calls, the table is being set for "fudging" the numbers to mitigate the slide. The fudging often starts on the accounting "gray areas" but then goes too far to get back. I predict that we will see more disclosure of corporate accounting frauds over the next 12 months. The table has been set!

Cheers, Mike

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