The SEC is Trapped in the Twentieth Century

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Today’s New York Times brings a column by Andrew Ross Sorkin that describes yet another loophole in the Securities and Exchange Commission’s regulations.  I’ve previously renamed this crowd the Shakedown and Extortion Commission.  My opinion has softened just a bit.  It turns out that this fiasco was caused by an act of Congress.  I hope this doesn’t surprise anyone. Apparently the SEC is trapped in the twentieth century.

In February, Valeant Pharmaceuticals approached Allergan’s David E.I. Pyott about buying his company. Mr. Pyott demurred.  Somehow, during that month, well-known Wall Street pirate (see below for details). William Ackman started accumulating shares of Allergan.  SEC regulations require that an investor who owns more than five percent of a company’s stock file a statement with the SEC.  BUT, guess what, under U.S. laws,  investors get a ten-day window to file their report.  In other words, Mr. Ackman had ten full days in which he could (a) acquire shares on top of his five percent holding and (b) not have to tell anyone about it. By the time Mr. Ackman was required to file his report he had accumulated almost twice the five percent threshold: 9.7 percent.

Congress Speaks, the SEC Obeys

The ten day rule was set by the Williams Act in 1968.  It’s a law which leaves no room for SEC interpretation.  As is so often the case, Congress is 45 years behind the current technology.  It’s enough to turn me into a libertarian.  No, wait, not really — but right now it’s a tempting thought.

What in the world was Congress doing passing legislation like this?  Even by the standards of Washington politics, this is idiotic.

William A. Ackman

Those who follow business news will be familiar with William A. Ackman.  For those who don’t recognize that name, here’s a summary of one of his recent ventures.  From the Huffington Post (excerpted, but not edited):

Three years ago, hedge fund billionaire Bill Ackman started buying shares in J.C. Penney. After two previous failures in the retail world, Ackman was determined to make this one work.

The result: a painful 17-month transformation attempt defined by nosediving sales, enraged employees and the ousting of the chief executive who was supposed to be the 111-year-old department store chain’s savior.

“Clearly, retail has not been our strong suit, and this is duly noted,” Ackman wrote in a letter to investors last week.

Now, Ackman’s Pershing Square Capital Management is selling its entire stake in J.C. Penney, according to a statement from the company issued Monday. The hedge fund had previously been the company’s largest shareholder, with around 18 percent of the shares outstanding.

Ackman and his fund may have lost more than $700 million on the gambit, BuzzFeed reported.

“Ackman officially exits stage left, having brought an American retailing icon to its knees,” Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, wrote in a note to clients on Monday. “In the grand scheme of things, that’s sad.”

Interim CEO Mike Ullman, who also ran J.C. Penney before his predecessor, is gradually purging the retailer of the remnants of the previous regime. Most of Johnson’s hand-picked executive team is gone, as Ullman continues to reverse his managerial policies and dial back his strategic initiatives.

The road to calamity at J.C. Penney began in late 2010, when Ackman’s Pershing Square and Steven Roth of Vornado Realty Trust began accumulating shares, eventually disclosing a combined 26 percent stake in the struggling retailer. The pair negotiated their addition to J.C. Penney’s board of directors and started to push for sweeping changes.

Ackman and Roth asked for then-Apple retail chief Johnson to be added on to the board of directors. Previous CEO Mike Ullman initially reached out to Johnson to offer him a seat on J.C. Penney’s board three or four years earlier, but the Apple executive declined because he was too busy with the rollout of Apple’s retail stores,according to a report from The Wall Street Journal.

Ackman has destroyed billions of dollars in shareholder value.  Here’s my advice: figure out what he’s buying and sell it. (Disclaimer: I am not a registered investment advisor.  If you follow my advice, you will probably lose a lot of money.)

 

 

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.