Insiders Rue Borrowing On Single Stock Holding
(Here's a contribution for the thread. Peter)
By RUTH SIMON and CASSELL BRYAN-LOW
Staff Reporters of THE WALL STREET JOURNAL
November 29, 2000
Jaap van der Meer was in a bit of a box.
The Alpnet Inc. president needed cash to exercise 150,000
stock options this summer, but didn't want to sell any of
his Alpnet shares, worried that it would send a negative
signal to investors. So he borrowed against his roughly
$3.2 million stake in the Salt Lake City multilingual
information-services firm.
As the head of a company, "you're almost like a celebrity,"
says Mr. van der Meer. When a senior executive sells shares,
he adds, "it never looks very good."
Neither, in hindsight, does his decision to borrow. After
he took out the loan, Alpnet stock sank 40%, and Mr. van
der Meer was forced to dump the 150,000 shares he had
exercised when the stock was trading at about $2.30. He
sold, or planned to sell, most of those shares at prices
ranging from 73 cents to $1.31, according to Securities and
Exchange Commission filings. Mr. van der Meer says the sale
was triggered by a "margin call," a demand that he come up
with additional cash or stock. He still holds 1.2 million
Alpnet shares valued at $712,500. In February, his Alpnet
stake was valued at $14.2 million.
At the time of the loan, "we felt, 'our company is doing
well and the stock market will reflect that,' " says Mr.
van der Meer. But, he laments, "markets are unpredictable
and irrational."
Such is the downside of a strategy that has grown in
popularity in corporate America during the past few years.
Wall Street firms have encouraged newly wealthy technology
entrepreneurs and other investors whose fortunes are
concentrated in a single stock to borrow against their
holdings.
But the stock market's carnage this year continues to
wipe out the value of shares being held as collateral,
triggering margin calls. These calls are a painful reminder
of the risks of putting all your eggs in one basket and
then borrowing against it. And it shows that the sting from
the massive number of margin calls this year extends beyond
novice small investors in the market over their heads.
"None of the people who borrowed anticipated the types of
declines we've seen," says Louis A. Korahais, director of
executive financial services at Citigroup Inc.'s Salomon
Smith Barney unit, one of many Wall Street securities firms
that lend to wealthy executives. Mr. Korahais says his
company has "very conservative lending practices." But he
adds: "There have been some [margin] calls. Anyone who
didn't acknowledge that ... would be lying."
Borrowing against a concentrated stock position has several
attractions. It allows executives who are wealthy on paper
but have little cash in their pockets to raise money to
diversify their holdings, exercise stock options or buy a
new home or a jet. The executives continue to profit from
any rise in the stock's price and avoid a potentially hefty
tax bill. The loans also avoid the glare of publicity
because they generally don't have to be disclosed.
Because these loans are private transactions, no one knows
how many there are or how many are in trouble. "The wink I
get from people is that there's a lot more of this going on
than you are aware of," says Robert Gabele, director of
insider research at First Call/Thomson Financial. Some
companies do disclose margin-related sales, either to
dispel the notion that an executive is bearish on the
company's stock or because they consider the information
"material." But Mr. Gabele believes such announcements "are
just the tip of the iceberg."
The high-profile casualties include Bernard Ebbers,
president of long-distance carrier WorldCom, who borrowed
heavily to boost his stake in the company. In September,
Mr. Ebbers entered into a complicated transaction,
involving three million of his roughly 19.4 million
WorldCom shares, that allowed him to raise $70.6 million
to meet a margin call, according to SEC filings.
But that large sum wasn't quite enough. This month,
WorldCom disclosed in another SEC filing that it had agreed
to guarantee as much as $100 million in principal and
interest owed by Mr. Ebbers and to lend him an additional
$25 million; as of Nov. 14, Mr. Ebbers had borrowed $11.5
million of that $25 million. WorldCom had already lent him
$50 million in September, according to the filing. Mr.
Ebbers, who declined to comment, "has used, or plans to
use, the proceeds" to repay margin loans secured by
WorldCom stock, the filing states.
Some executives say they borrowed to offset their
concentrated holdings. That was the strategy of Mark
Langdale, a director of CapRock Communications Corp. He
says he was besieged by brokers offering to let him borrow
against his shares in the Dallas-based competitive local-
exchange carrier.
"I had a concentrated position ... that was hard to
liquidate," recalls Mr. Langdale, who borrowed against his
CapRock stake to invest in real estate and venture capital.
But this summer, CapRock's stock, which had traded as high
as $58.50, tumbled to less than $10 a share. Faced with a
margin call, Mr. Langdale was forced to sell roughly 1.05
million of his shares for $6.045 million, less than one-
tenth of the $61.3 million at which those shares were
valued at their peak. "I underestimated the risk," he
says. "In hindsight, I would have done it differently."
Mr. Langdale still directly holds roughly 1.6 million
CapRock shares valued at about $7.5 million; he indirectly
owns an additional 5.7 million through trusts and a
partnership in which he has a controlling interest.
(CapRock announced last month that it will be acquired by
McLeodUSA Inc. in a stock-for-stock transaction.)
Harold Blue, founder and vice chairman of ProxyMed Inc.,
was forced to sell roughly 620,000 ProxyMed shares to meet
a margin call after stock of the health-care information-
technology concern plunged from a high of $12.125 to less
than $4 a share. Mr. Blue says he still holds about 50,000
ProxyMed shares. They are now valued at roughly $50,000. He
also holds an additional 500,000 options on ProxyMed
shares; those options now are worthless.
Mr. Blue says he borrowed a total of $1.8 million to buy
additional ProxyMed shares on the open market and to pay
living expenses, which included private-school tuition for
three children and a top-of-the line Mercedes.
"My standard of living was more than my salary," says Mr.
Blue, who received a cash salary of $202,198 from ProxyMed
last year. "I did what was then painless." He concedes he
would sometimes lie awake at night worrying about the risks
of the loans. "But I'm such an optimistic person," he
explains. "I thought it would be OK."
Other executives battered by margin calls aren't as
forthcoming. PSINet Inc. said last week its chairman and
chief executive, William Schrader, is in the process of
selling all, or nearly all, of his 11.4 million-share stake
in the data-communications company to meet a margin call.
Mr. Schrader owed $22.8 million of principal and interest
on four lines of credit secured by the shares, an SEC
filing shows. At the stock's peak of nearly $61 a share,
Mr. Schrader's PSINet stake was valued at nearly $700
million. The sales are "a private matter between him and
his bank," a spokesman says.
Earlier this month, Hollywood Entertainment Corp. Chairman
and CEO Mark Wattles disclosed that brokerage firms and
financial institutions had sold 7.3 million of his shares
to satisfy margin calls. Mr. Wattles, who now holds roughly
2.5 million shares valued about $3.4 million, says he "took
out the loans at various times," but declined to say for
what he used the money.
At its peak, Mr. Wattles's stake was valued at nearly $190
million. The video-rental chain pulled the plug on its e-
commerce business at Reel.com this summer.
Alfred West, vice chairman of Viatel Inc., was forced to
sell 1.2 million of his nearly 5.1 million Viatel shares
this fall to meet a margin call, according to the company
and an SEC filing. When Viatel, a provider of long-distance
data and voice services, was trading at its high of $75.38,
Mr. West's stake was valued at roughly $385 million. As of
Tuesday's 4 p.m. price of $5.94, his remaining holdings are
valued about $23.2 million. Mr. West didn't respond to
requests for comment.
In some cases, companies have stepped in to prevent margin-
related sales from further depressing their slumping
shares. When eCollege.com founder Robert Helmick and one
current and one former company executive received margin
calls this summer, the company rounded up a group of
investors to buy their 1.4 million shares.
"We had to scramble to find a set of buyers ... because our
stock price was falling like a knife," says eCollege.com
Chairman Oakleigh Thorne, who is affiliated with an
investment fund that was one of the buyers. The group paid
a little less than $3 a share for the stock, which as of 4
p.m. trading Tuesday stood at $6.50.
Mr. Thorne adds that he believes that "pitching margin
loans to a bunch of fairly unsophisticated executives and
founders is irresponsible."
Mr. Helmick, who left the company in September, concedes he
didn't fully appreciate the risks of margin. But he says he
doesn't regret taking out the loan because it allowed him
to pay back people who lent him money to start the company.
Still, if someone asked him whether or not to borrow on
margin, he adds, "I would say that you better have enough
that you can afford to lose it." |
