Comdisco loans re-examined
106 former execs at bankrupt firm press for relief
chicagotribune.com
By Rob Kaiser
Tribune staff reporter
August 11, 2002
The procedure has become routine: A company runs into trouble. Executives get sweetheart deals and wiggle out of loan obligations. Low-level workers get pink slips and shareholders get stiffed.
As tales of top-level excess and special treatment continue pouring out of Enron Corp., WorldCom Inc. and Tyco International Ltd., a group of current and former executives at bankrupt Comdisco Inc. is standing up to make a difficult--not to mention ill-timed--argument. The $109 million in loans the 106 executives took out four years ago to buy company stock should be forgiven, the group is arguing.
They have gained partial support from an unlikely source, Comdisco's creditors, who endorsed a broad wind-down plan for the company that includes forgiving between 20 percent and 80 percent of the executives' loans depending on how long they remained at the company. A bankruptcy court judge approved the plan late last month.
But the loan recipients don't appear ready to settle. They're preparing legal cases on several fronts, charging that the loans were illegal, they were pressured into the investments and top officials at Rosemont-based Comdisco misled them about the company's direction.
"The company, the board just turned their backs on us," said one loan recipient who asked to remain anonymous.
Comdisco's loan program started after the markets closed on a Friday afternoon in February 1998, when executives at a sales retreat in Palm Springs and the company's Rosemont headquarters were told about the initiative.
About 135 executives were given until 6 p.m. that Sunday to decide whether to take out five-year loans, which Comdisco guaranteed, to buy company stock.
Not surprisingly, views on how the offer was communicated now vary widely.
Some executives say that not participating in the offering would have jeopardized their careers.
A lawsuit filed by Thomas Flohr, a former Comdisco official then based in Europe, claims the executives were "induced, persuaded and cajoled" to participate in the program during the Palm Springs retreat, where they were "treated to golf outings, lavish meals and unlimited alcoholic refreshments."
Another executive said it would have been "political suicide" to not take part in the program.
Top Comdisco officials counter that many executives had inquired about how they could take a greater stake in the company. Plus, the officials point out that several people did not take out loans.
"They were not punished in any way in terms of their careers," said Jack Slevin, who was Comdisco's chief executive at the time. "That's absurd."
Slevin, though, puts more stock in the argument that executives were misled about the company's direction.
Comdisco traditionally focused on leasing technology equipment and backing up companies' electronic data, but it began entering riskier ventures after Slevin handed over the CEO reins in early 1999 to Nicholas Pontikes, the then 34-year-old son of the company's founder.
Investments soured
Amid dot-com hysteria, Pontikes pumped up the company's investments in start-up businesses and purchased a high-speed Internet firm. Those investments soured when the Internet bubble burst, leaving Comdisco with a liquidity crisis and plummeting stock price.
Today, as many as one-quarter of the 106 executives who took out loans may have to file for personal bankruptcy if they're forced to repay the money.
They won't get much sympathy from people like Cynthia Richson, director of corporate governance at the State of Wisconsin Investment Board, who argues they should not receive preferential treatment.
"The bottom line is that the shareholders always get stuck holding the short end of the stick," Richson said. "It just strikes me as a very sweet deal if you can always come out ahead of the curve."
Richson's anger has been fueled by several recent episodes of excessive executive loans. WorldCom lent a whooping $408 million to former CEO Bernard Ebbers, while the Wall Street Journal reported last week that former Tyco CEO Dennis Kozlowski had tens of millions of dollars in company loans quietly forgiven.
But the Comdisco executives say their push to get out of the loan obligations should not be confused with the clear-cut cases of corporate and executive malfeasance. If it wasn't for company pressure, the executives argue, they wouldn't have borrowed an average of $1 million apiece to buy stock.
The group, though, is working with Comdisco on its first argument that the loans were illegal, violating a law resulting from the 1929 stock market crash that limits how much stock investors can buy with loans.
The regulation holds that investors must put up an equal amount of cash if they plan to invest loaned money. For example, a person planning to buy stock with a $500,000 loan would have to also invest $500,000 of his own funds to comply with the law.
Still, David Van Zandt, dean of the Northwestern University School of Law, said that is a difficult argument for Comdisco and the executives to win, particularly since the company approached the bank about the loans.
"It's hard for them to argue with a straight face that they were poor consumers hoodwinked by a brokerage firm," Van Zandt said.
Bank One made loans
Bank One, which made the loans, is now seeking nearly $1.7 million in principal and interest. In a court filing, the bank submitted the original loan agreement, which includes a section that says the loans will comply with the loan investment regulations.
Tom McGuire, a retired stockbroker and longtime Comdisco shareholder, said given the special circumstances, the parties should try to find some middle ground. He's not opposed to lower-level executives--though not the company's top officials--receiving partial forgiveness of the loans.
But, McGuire added, they should not be able to shake entirely free of the loan obligations.
"Sometimes you have to walk away," McGuire said. "I think people have to be somewhat responsible for putting their signature on a piece of paper."
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