Jim, this one will crack you up, and I figured that since so many firms are holding OCCF stock because of this guy, it must be a buy, as they will have to run it to get out>
(I am up 20+% this minute)
Optical Cable CEO's Buying Binge
Brings Big Problems to Wall Street
By SUSANNE CRAIG
Staff Reporter of THE WALL STREET JOURNAL
ROANOKE, Va. --
Robert Kopstein, like many people, caught the technology-stock bug in the late 1990s. As the market kept rising, he borrowed to buy more. And like so many others, he looked on in shock when the bubble burst.
But unlike most investors, Mr. Kopstein was also the chief executive of a public company and the owner of most of its shares. He used millions of them to increase his stock-market leverage and had his company invest in the market, too.
Now, even as the tech bubble slowly fades from memory for many burned investors, it is causing new pain for Mr. Kopstein, as well as for his fiber-optics company and for several securities firms he dealt with. Shares of the company, Optical Cable Corp., have plunged even though its business remains healthy. Securities firms that sold Mr. Kopstein stock on margin have found themselves reluctant owners of Optical shares. And Mr. Kopstein is out of a job.
By repeatedly borrowing against his Optical shares to buy other stocks, Mr. Kopstein ran up more than $100 million in debts to Wall Street firms. Most of the firms where he pledged a chunk of his shares say they didn't know he was pledging other chunks to other firms. Some say they found out only after tech stocks crashed and his collateral came up short.
The case has shone a light on a dim corner of Wall Street: margin lending. Buying stocks "on margin" lets investors borrow up to 50% of the value of their portfolios from the brokerage firm. If the portfolio's value falls, the firm demands more cash and then, if it isn't forthcoming, simply sells some of the stock to repay itself. It's a steady and lucrative business for Wall Street. But it's not always a well-policed one, as Mr. Kopstein's story shows.
Mr. Kopstein, 51 years old, claims he didn't know what he was getting into. "The brokers didn't mention the word 'margin' in my dealings with them," he says in an interview. "They would all phone up and say they have a lot of services to offer. It's not like I went looking for them."
The response from one firm: "Kopstein is the maker of his own misfortune," said Bear Stearns Cos., in a federal-court dispute that grew out of the mess.
His Own Company
The son of an electrician and Wisconsin dairy farmer, Mr. Kopstein co-founded Optical Cable in 1983. After buying out his partner, he took it public in 1996, registering it state by state himself instead of using an underwriter.
It was a profitable company in a hot field, manufacturing fiber-optic cable. The stock soared tenfold within weeks. It split and split again. This made Mr. Kopstein rich, but he was never focused chiefly on the money, says his former wife, Judy Kopstein, who says they are still on good terms. Though he has a large house in an affluent neighborhood that overlooks the Blue Ridge Mountains, Mr. Kopstein rarely flies first class and drives a 10-year-old car. "I have never cashed in a single share of the company," says the entrepreneur, who corporate filings show was paid about $587,000 in salary and bonus last year.
Mr. Kopstein was investing in technology stocks long before the sector took off, his ex-wife says. She recalls one Christmas when he gave a daughter a gift of some money and suggested she put it into tech stocks. (Wowee, what a nice guy! I bet he even likes dogs.)
Moving It Around
In August 1997, Mr. Kopstein took steps to diversify his extensive Optical Cable holdings, depositing nine million of his shares at a branch of A.G. Edwards in Seneca, N.C. He didn't sell, a move that would have had to be disclosed and could have hurt the stock. Instead, he bought other stocks on margin, borrowing part of their cost from Edwards.
Then, rather than put up cash for the remainder of the purchase price, he used some of the Optical Cable shares for payment, in effect borrowing against them.
Optical Cable's CEO Wins Order to Keep Firms From Selling Stock (Oct. 3)
With his holdings worth at least $370 million, he was a big catch for A.G. Edwards, a midsize securities firm based in St. Louis. He says that though he had once contacted that firm about going public, it was Edwards that came to him in 1997, pitching its services. Edwards won't comment.
Mr. Kopstein borrowed an initial $10 million against his Optical Cable shares. He used it to buy mainly technology stocks. He followed with more rounds of margin buying, multiplying his debt to the firm several-fold.
Within two months, Mr. Kopstein was also buying stocks on margin through a Bear Stearns Boston office. He used an initial 3.8 million of his Optical Cable shares to secure a margin loan from Bear Stearns, which eventually grew to $21.5 million.
Mr. Kopstein told Bear Stearns he hadn't pledged any Optical Cable shares to anyone else, the firm has said in a filing in federal court for the Western District of Virginia. Such a pledge would be important to a Wall Street firm because if it ever had to claim the shares and sell them, it would want to be sure other firms weren't doing the same thing and pummeling the stock. Federal rules also might restrict how much stock the brokerage firm could sell at once.
Mr. Kopstein doesn't deny giving assurances to firms about not pledging other shares elsewhere. A written assurance given to one firm, Citigroup's Salomon Smith Barney, has been filed in federal court in Virginia. Mr. Kopstein says he could have signed this or other such forms. "I didn't read it. They just told me the forms were standard stuff," he says.
As for the brokerage firms, they could have avoided the problem by placing in escrow any shares the client promised not to pledge elsewhere, says Henry Hu, a securities-law professor at the University of Texas Law School. "Brokerage houses could have been more careful," he says. "You have to weigh the costs of taking such steps. But, at least in hindsight, A.G. Edwards presumably believes it would have benefited from such a move."
None of the firms will comment publicly on why they didn't take that step, although one says it's a big hassle that firms just don't bother with. Edwards says it views the case as an isolated one and believes "we have adequate systems in place to manage margin borrowing."
Before the end of 1997, Mr. Kopstein received yet another large margin loan, from a third firm: $8 million from PaineWebber. As his borrowing grew, the firm, now UBS Warburg PaineWebber, also received written assurances he hadn't pledged any of his Optical shares elsewhere, it has asserted in federal court.
Over the next year, similar scenarios played out at other firms as well: Merrill Lynch & Co., Goldman Sachs Group Inc. and Scott & Stringfellow, based in Richmond, Va. Mr. Kopstein's $100 million-plus of debt was a manageable sum for the entrepreneur, who at one point during the boom was a billionaire on paper.
Mr. Kopstein says that broker after broker approached him to become a client. He says one reason he opened a lot of accounts was that he hoped having relationships with the securities firms might encourage them to issue research reports on Optical Cable stock. They didn't, however. "We never had the support of Wall Street," Mr. Kopstein says.
The company Mr. Kopstein ran also invested in the stock market. While many corporations stow their cash mostly in safe but low-yielding debt, Optical Cable plowed much of its cash into stocks beginning in 1999. The company, of which Mr. Kopstein was chairman and president as well as CEO, bought mostly technology stocks, sometimes on margin.
The Tumble Begins
But in March of last year, tech shares started sliding. Optical Cable's own stock, trading on the Nasdaq Stock Market, sank 34% in 2000, and continued downward early this year. This spring Mr. Kopstein's brokerage firms, after issuing margin calls, started liquidating the stocks he had bought. They sold everything, from Intel shares held at A.G. Edwards to what Scott & Stringfellow describes in court documents as "risky small cap stocks."
But this selling wasn't enough. Stocks had fallen so far that even after his positions were liquidated, Mr. Kopstein was on the hook to the seven brokerage firms for a total of $86 million.
At Bear Stearns, alarms went off in the New York office of Martin Shulman, senior managing director of global credit. He wrote to Mr. Kopstein on May 30 warning that he owed $20.7 million and if it wasn't paid, Bear Stearns would begin liquidating the Optical Cable shares he had pledged. Mr. Shulman declines to comment.
Throughout June and into July, Bear Stearns held off. On Aug. 1 it pulled the trigger, selling 12,500 Optical Cable shares for $9.13 apiece. Bear Stearns sold a total of 207,800 Optical Cable shares in August, and the stock's price slid about 11% for the month, to $8.25. In September, Bear Stearns dumped 284,400 more shares on the market.
Optical Cable's business remained healthy. Despite a weak global market for fiber optics, Optical Cable's revenue for the fiscal nine months ended July 31 was up 18% from the prior year. However, losses of about $11 million from its stock-market trading left the company with a $2.9 million loss for the nine months, versus the year earlier's $7.1 million profit.
But by this time, the securities firms were selling Mr. Kopstein's pledged Optical Cable shares in earnest. Merrill Lynch, for one, sold 933,000 of them in September. Under the onslaught, the stock, which was at $42 in March 2000, sank to $1.85 by Sept. 26.
That day, Optical Cable tried to explain to the public why its stock was tumbling. A news release said that Mr. Kopstein had pledged a "significant" portion of his vast holdings to obtain margin loans. Even the board didn't know how much, says Randall Frazier, an outside director. He says when the board met two days later, it was stunned to learn that the founder had pledged almost his entire stake in the company against his stock purchases.
"He should have told us. It would have been the gentlemanly thing to do. But he didn't," Mr. Frazier says. "Even the brokers didn't know he had pledged these shares."
Going to Court
Mr. Kopstein tried to get the federal court in western Virginia to halt the brokerage-firm selling. The firms "have continued to sell Optical Cable stock in an effort to manipulate the market price and to drive down the price so that they will own and control Optical Cable," he asserted in a request for a temporary restaining order. It was denied.
At least three of the firms -- Goldman Sachs, Salomon Smith Barney and Bear Stearns -- have recouped their losses by selling Optical shares, according to people familiar with the matter. But as of early last month, Scott & Stringfellow was still owed $3 million, while A.G. Edwards was still out $37 million, almost equal to Edwards' last quarterly profit.
Those two firms sued Mr. Kopstein in federal court in Virginia. In separate suits, they alleged that he had violated state and federal securities law by not telling them he had pledged most of his Optical shares as collateral at various firms. Mr. Kopstein hasn't replied to the suits.
A.G. Edwards recently withdrew its suit and plans to pursue an arbitration case. "Unfortunately, when one makes loans sometimes there are difficulties collecting them," the firm says through a spokeswoman.
Some shareholders are more vocal. "In essence, he gambled our investment away and no one knew until it was too late," says Charles Farrell of Katy, Texas. Optical shares closed at $1.17 Tuesday, making his $20,000 investment in Optical Cable now worth about $2,000. Mr. Farrell has filed a suit in Virginia federal court, seeking class-action status, that alleges concealment of material information about Mr. Kopstein's margin borrowing.
Optical's board hired a financial adviser to help it with the mess and then met again on Dec. 3. Mr. Kopstein and three other officer-directors gathered at the company's Roanoke fiber-optics plant, while two outside directors were on the phone from a law office across town. When Mr. Kopstein learned that some wanted him out, voices began to rise. With two directors on speaker-phone, communication became difficult. The meeting adjourned and reconvened at the law office, with everyone face to face.
Mr. Kopstein says he grew very upset at times during the meeting. He says the board came in with a plan -- his resignation -- and refused to waver from it. He says he demanded that the other directors agree to put his leadership to a shareholder vote, but they refused.
When the meeting ended, Optical Cable announced that its chief financial officer, Neil Wilkin, would be taking over the reins. The founder "could not devote his focus and attention to his duties" as CEO because of the Wall Street disputes, the news release said, so he had been "removed." |
