Many public companies love to hate hedge funds, especially those that emphasize the short aspects of their “long-short” investment strategy. And hedge fund managers are quick to point out that corporate management teams often give the hedge funds solid reasons for shorting companies’ stock.
But two recent news items make us think that both sides are upping the ante to risky new levels.
Last week, Harbinger Capital Partners, a shareholder of energy distributor NorthWestern Corp., announced a “non-binding” shareholder vote to press NorthWestern to auction itself. In essence, the shareholder is attempting to put the company in play under the guise of an “advisory” vote.
According to The Deal.com, Harbinger “will seek a nonbinding shareholder vote on whether Sioux Falls, S.D.-based NorthWestern should launch an open auction process to sell the company.
“'The referendum is meant to send a strong message to management in a nonbinding fashion regarding shareholder wishes,’ said a NorthWestern shareholder who requested anonymity. [Our comment: That wouldn’t be Harbinger asking for anonymity, would it?]
“The dissidents are hoping that the referendum pitch, which is turning heads in the world of proxy fights and shareholder activism, also will convince the company to drop an anti-takeover, poison-pill provision it adopted in December.”
This week, Biovail, a Canadian pharma company, filed suit against SAC Capital Management, which The New York Times labels “one of the most powerful hedge funds on Wall Street.” The company's suit alleges, among other things, that SAC colluded with others to issue misleading research reports to drive down the price of Biovail's stock.
The Times reports, “The lawsuit, filed [February 22] in New Jersey Superior Court in Newark, lays out a scheme by several hedge funds to send "ghost written" research reports — all negative — to Camelback, an independent investment research firm based in Arizona now known as Gradient Analytics.”
“Camelback would wait for the hedge funds to accumulate a short position on the stock — a technique that allows traders to make money if the stock price falls — and then Camelback would release the report, the suit says. As a result of the reports of Camelback, as well as subsequent reports by David W. Maris, an analyst with Banc of America Securities, shares of Biovail stock fell more than 50 percent between 2003 and the spring of 2004, resulting in its business reputation being ‘devastated’ and curtailing its ability to access capital, the lawsuit says.
“’This action arises from a massive, illegal and continuing stock market manipulation scheme, which has targeted and severely harmed Biovail, among other companies, and which has resulted in immense ill-gotten profits for SAC Capital and other extremely powerful hedge funds,’ the lawsuit says.
“Ed Tagliaferri, a spokesman for SAC, said: "’The allegations of the complaint against SAC are outrageous and defamatory and SAC will defend itself and its investment practices vigorously. Biovail's true issue is the valuation that the public markets place on their common stock. That disagreement should be resolved in the public markets, not in litigation, especially not in litigation dressed up with false allegations.’
Biovail’s suit is seeking US$4.6 billion in damages.
It’s becoming a strange world, when utility company investors start acting like 1980s raiders, and public company management starts acting like members of the plaintiff’s bar.
investor relations
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