A must read article!!!! This is the first time I have heard of this.
Com Dev orders director to quit after reviewing his stock selloff, In novel move, Fitzgerald also told to compensate buyers of the shares.
Thursday, July 16, 1998
By Patrick Brethour
Technology Reporter(Globe and Mail)
Com Dev International Ltd. director who sold $2.6-million in shares two weeks before the company's stock price plummeted because of unexpectedly poor earnings has been told to resign -- and to compensate the buyers of his shares for their losses.
William Fitzgerald, a director at Cambridge, Ont.-based Com Dev, sold 99,700 shares or two-thirds of his holdings on May 25 and 26, according to the latest insider trading reports from the Ontario Securities Commission. Mr. Fitzgerald was also president of the space group at the satellite and phone systems company until last October.
Ten days after Mr. Fitzgerald sold the stock, Com Dev said it would report a profit of just 2 cents a share, far below the expected earnings of 13 to 15 cents a share. The shortfall sent Com Dev shares to their biggest one-day drop in the company's history, as the stock fell to $16.30 from $23.25.
In the following month, the company's market value has fallen nearly $500-million, dropping to $284.2-million based on yesterday's close of $8.85 on the Toronto Stock Exchange from $746.6-million on June 4.
As investors scrambled to sell off their shares on the morning of June 5, Com Dev's board was deciding how to deal with Mr. Fitzgerald's stock sale, which shielded the director from the steep capital losses of many ordinary investors.
The three independent Com Dev directors examining the issue took what experts say is an unprecedented step yesterday, recommending that Mr. Fitzgerald resign from the board and make good any losses incurred by those who bought his shares.
Under the proposed plan, affected shareholders could opt to take cash or return their shares to Mr. Fitzgerald at the original price -- which is nearly three times higher than yesterday's close.
Com Dev said Mr. Fitzgerald, who is in his early sixties, has agreed to resign immediately and pay out $1.7-million under the arrangement. His consulting contract with Com Dev has also been terminated.
Mr. Fitzgerald, who had been a Com Dev director since September, 1994, did not return calls yesterday so it is not known if he will comply with the directors' proposal. He is under no legal obligation to do so.
One of the independent directors, Wesley Voorheis, said the committee felt that Mr. Fitzgerald's actions were "inappropriate," but said the board did not establish whether he knew of the impending shortfall in earnings. "What's inside Mr. Fitzgerald's head is anyone's guess."
Trades by other directors in April went unchallenged, Mr. Voorheis said.
Despite the board's quick action, Mr. Voorheis said he is under no illusion that investors will shrug off Mr. Fitzgerald's actions. "They're not going to be happy about it. The board was not happy about it."
But Val O'Donovan, chairman and chief executive officer, said Mr. Fitzgerald was part of a small group of directors and Com Dev managers who were told in mid-May that the company would not meet earnings projections.
Mr. O'Donovan, who founded Com Dev, said he was upset when he learned of the timing of Mr. Fitzgerald's trades. "I was very disappointed and felt it was the wrong thing to do."
By June 7, the Com Dev board had hurriedly assembled a policy for insider trading that prohibited any transactions by directors and senior executives unless approved by Mr. O'Donovan. The board is to implement a permanent formal policy later this month, Mr. O'Donovan said.
Corporate governance experts lavished praise on Com Dev's actions concerning Mr. Fitzgerald, saying the company has set a new standard for defending the rights of ordinary shareholders.
"This will certainly turn some heads," said J. Richard Finlay, chairman of the Centre for Corporate and Public Governance in Toronto. "It's an outstanding example of how the system should work."
He said Com Dev's actions are especially timely given the debate over the responsibility of directors sparked by the collapse of Bre-X Minerals Ltd.
Bill Riedl, president of Fairvest Securities Corp. in Toronto, said he's never heard of a precedent to Com Dev's action. "It's a very responsible action of the board. It's quite something."
And Com Dev is wishing that such situations will remain rare, at least as far as it is concerned. "Hopefully, it will be the last," Mr. Voorheis said.
With files from reporter Mark Evans. |
