Hi Rick,
I'm not saying Babish comes out of this looking like a white knight, but he sure looks clean next to Rhodes. I guess how he looks depends on your baseline for comparison.
Have you ever seen pictures of sunspots, Rick? Those sunspots are very hot-- I can't remember how hot, but the gases that make them up are heated to at least several thousand degrees. A sunspot would look very bright if you could remove it from the sun and stick it out by itself somewhere in the middle of space. A sunspot only looks black because it is on the surface of the sun, most of which is tens of thousands of degrees hotter than the sunspot. The sunspot appears black only because its shining luninescense is overwhelmed by the brilliance of the much brighter sun on which it sits.
The same is true of Dr. Babish. If you compare him to Mother Theresa he is quite tarnished. If you compare him to Rhodes he looks like a shining knight.
I've been giving a lot of thought as to why Babish sold his stock. You pose a very good question, noting that he could have been very rich had he just held in there. I don't really have an answer, but this is the best I can figure out.
First, I reject out of hand the scenario that Paracelsian spells out in its case against Babish. I think the idea that he sold his shares so that he could buy them back at a lower price is shear nonsense. I don't have time to say why I think this is nonsense right know, but I plan to discuss this in a longer post this weekend. Suffice it to say that I don't buy Rhodes' theory.
Second, you are right when you say that Babish's actions don't make financial sense. Things could have been rough at work, but Babish could have been well on his way to riches if he had only hung in there a little bit more. There must be a reason for his financial suicide. This can only lead me to the conclusion that this is about more than just money. What is this about? I can only guess.
We know Babish and Rhodes were in a power struggle for the company. We have very good reason to believe that part of the problems revolved around the contract talks between Babish and PRLN:
See points 16 - 24 of Babish's defense:
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Let us for argument's sake assume that Babish is telling us the true truth in his account of his contract talks. Then the following is true:
1) The company had a moral and legal obligation to pay Babish what it owed him: i.e. he had already earned his warrants and they should have registered his warrants with the SEC so he could trade them, just like any other warrant holder. The fact that they had not registered the warrants may have cost Babish between $375,000 and $1.8 million.
See points 18 - 31
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2)Sometime before February 10th, the company had agreed to make Babish's new contract retroactive to October 1994, giving Babish $156,000 in retroactive pay.
3) On March 10th the company made a proposal on which it renigged on the back pay and threatened to cancel his warrants. Assuming there was already an agreement to make the contract retroactive, the first action was an example of bargaining in bad faith and the second action was illegal. To make matters worse, the proposed contract was for only 1 year instead of three.
Now this may sound naive, but I offer the following as a partial explanation for Babish's actions. This is about more than just money. This is also about respect. Paracelsian dissed Babish by offering a bad faith contract.
Have you ever wondered why some baseball players moan and groan about only making $3 million a year and complain that if player X is making $4 million, they should be making $6 million? It's not just about money. Most people don't spend that type of money in their lifetime. It's the way players measure the respect their ball clubs have toward them compared to that of their peers. Some players view their salary as a measure of self-worth. Perhaps a small part of Babish's actions can be attributed to his interpreting the company's bad faith actions toward him as a lack of respect. He deserved better than that, since when it comes right down to it, his staying was vital for the company. Babish might have also felt a bit competitive in his desire for a higher salary because he was paid $171,257 in 1996 compared to $195,000 for Rhodes. Babish certainly deserved a higher salary than Rhodes did. Can anyone here name one thing that Rhodes has done to build value for the company? Just one?
Of course, this competitiveness is a childish game that has hurt the company. I would love to be insulted with a $171,000 salary.
But this is all arm-chair psychology, and it is very possible that not a word of my speculation so far about Babish's motivation is true.
There are other reasons to explain Babish's behavior.
Let's assume the Board intentionally insulted Babish by their bad faith bargaining. Why would they do that? After all, Babish was as important to PRLN as Michael Jordan is to the Bulls, and no coach in his right mind would insult Michael Jordan. Perhaps the Board was trying to get rid of Babish because he had become a trouble maker. They couldn't just fire him, so they did the next best thing by insulting him and hoping he would just leave. Why would they do this?
Perhaps they were trying to stand by the man who had appointed them to the Board in the first place (Rhodes). Babish was accusing Rhodes of serious misdeeds, such as the stock giveaway for Indian herbs that never existed, an excessive payment of 23% of the proceeds of a private placement that turned out to be flawed, a $1.3 million stock buyback, etc. etc.
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Perhaps Babish was sick of seeing Rhodes' actions running the company into the ground. Perhaps Babish's contract negotiation was about more than money. Perhaps it was a proxy for the respect the Board paid to Babish compared to that it paid to Rhodes. Perhaps it was about their relative power and this was the only method, short of resigning, that Babish felt he had to get the Board's attention. Once he got their attention, perhaps he they could have made conditions there more tolerable.
I imagine that with the accusations in the air, it must have been a very difficult place to work. I bet there were a lot of shouting matches, and if Rhodes had destroyed my life's work the way he seemed intent on destroying Babish's it would be mighty difficult for me to refrain from punching him out. If I were in Babish's shoes, selling my stock and quitting the company might seem like measured steps of restraint compared to what I would like to have done.
This is all just speculation. I don't really know his motives. All I know is that it is not just about money, because an optimizing monetary strategy would have been for Babish to keep his shares and stay with the company. Even if he lost out on his warrants and didn't get his retroactive raise, he would have been much better off with his 300,000+ shares of stock if this company stock was over $20.
I don't want to sound like I am justifying Babish's actions. They seem near-sighted and ill-advised. But this may provide a clue to understanding why he acted the way he did. And it is possible that we still don't have the whole story. I wouldn't be surprised if there is a whole lot more crap we don't know about yet.
Robin |
